Understanding Your Crypto Taxes

Man doing his crypto taxes

Understanding Your Crypto Taxes

It’s hard to go very long without hearing about cryptocurrency these days. Whether it’s in the news, on the internet, or casually spoken about with your friend group, it seems like cryptocurrency is everywhere with the popularity of this digital asset system expanding rapidly.

If you are already involved in the world of cryptocurrency, then you might be wondering what your implications are when tax season rolls around. While cryptocurrency is a relatively new concept, there are still plenty of details to be found online that can help you know what to expect when you file your taxes.

In this article, we will focus on the way that the Canadian tax system handles cryptocurrency. Heads up: most of the information in this guide applies to standard virtual currencies like Bitcoin and might not apply to your precise situation. It’s always best to consult with an accountant or financial planner before making any major decisions.

Table of Contents

Is Crypto Taxable in Canada?

With more and more Canadians taking part in cryptocurrency, the inevitable question that arises is, “Is cryptocurrency taxable?” The answer to this question, in short, is “yes”. More specifically, cryptocurrency is treated as a commodity by the CRA. This means that, depending on the circumstances, it will be treated as either a capital gain or as business income.

Man holding crypto

Here are some scenarios when cryptocurrency is taxed:

  • Selling cryptocurrency
  • Exchanging or trading cryptocurrency for another cryptocurrency
  • Exchanging cryptocurrency with fiat currencies like CAD or USD
  • Buying a service or goods with cryptocurrency
  • Gifting cryptocurrency (over the CRA limit)
  • Mining or staking cryptocurrency
  • Getting paid in cryptocurrency
  • Getting cryptocurrency rewards

The only scenario where you don’t get taxed is when you are holding cryptocurrency in a wallet or exchange.

Woman Doing Crypto Taxes

Is the CRA tracking Crypto?

While some cryptocurrency enthusiasts may be excited about knowing a lot about a new financial technology, don’t think that the CRA isn’t in the know. The CRA is very aware of cryptocurrency—so much so that they actually maintain a comprehensive guide for cryptocurrency users.

The Canadian Senate has been maintaining a policy surrounding cryptocurrency since 2014 and makes frequently changes and updates to keep up with the new realities that come along with every new year.

Trading, selling, and buying cryptocurrency does not mean that you may shelter income from the CRA. The CRA has the power to track and quietly audit cryptocurrency investors.

Which Crypto Transaction are Taxed?

The CRA taxes most cryptocurrency transactions, with the one exception being the buying and holding of cryptocurrency.

However, once Canadians sell cryptocurrency, this transaction will be taxed as either a capital gains tax or as business income. More on this soon.

Any time that cryptocurrency is used to pay for a good or service, the CRA treats it as what is known as a “barter transaction”. “Barter transaction” is a term used for income tax purposes meaning a purchase that is made without using legal currency. Its name refers to its roots as a transaction that is made by trading goods, but these days, the CRA recognizes that it’s much more common for barter transactions to involve cryptocurrency than to involve the trading of goods.

Cryptocurrency as a business income

When its not related to goods, the CRA will either tax individuals under business income or capital gains guidelines. So how can you determine which way you’ll get taxed?

The CRA recognizes that not everyone who trades cryptocurrency is engaging in a business activity and will treat each case differently depending on the circumstance. It is essential for all cryptocurrency users to determine whether or not their cryptocurrency activity is technically business income. It may be the case that some activity is and some activity isn't (this can get confusing, so it’s not a bad idea to partner with a good accountant who is experienced with cryptocurrency).

Other obvious signs to look for include upfront commercial activities or activities that involve business-like actions (like writing up a business plan), or if you sell a product or service. In short, if you have the intention to make a profit, your crypto activity is probably related to business in the eyes of the CRA.

It’s important to differentiate crypto business income from non-business income. Any profits that arise from a business-related crypto activity will be considered business income and will be taxed appropriately. Again, even if you do not run a cryptocurrency business, you may perform stand-alone actions that qualify as a business transaction, such as selling crypto at a profit. For example, if you make $20,000 from selling cryptocurrencies at a profit, you will have to report $20,000 in business income to the CRA. The CRA taxes 100% of the profits made from business income.

Capital Gains Tax on Cryptocurency

If the profits that you make from engaging in cryptocurrency markets are not part of a business, then you will report your income to the CRA as a capital gain. The CRA states that capital gains occur when capital property is sold for more than its cost plus the costs associated with selling the capital property. Examples of other capital gains that you may be familiar with include bonds, shares, real estate, and trust units. 

As is custom with capital gains, only 50% of your crypto-related profits will be subject to income tax. If you have capital losses that arise from cryptocurrency, you will be able to use this to offset your taxable capital gains, but you can’t use it to offset your other earnings (including your earnings from employment). 

How to Calculate Crypto Capital Gains

It’s relatively easy to figure out your cryptocurrency capital gains. Remember, capital gains happen any time you transfer, sell, trade, or spend your crypto, and refers to the difference in value from when you first acquired your crypto and at the time of parting with it.

In order to figure out this number, you’ll need to determine how much it cost you to initially buy your cryptocurrency. Be sure to include transaction fees of any kind. You will then subject this price from the stated market value for the day you parted with your crypto (or for the amount you sold it for) to figure out your capital gain.

You only have to pay tax on 50% of your capital gains. For example, if you have a capital gain of $1,000, you will only need to pay taxes on $500.

Canada uses what is known as the ACB, or Adjusted Cost Basis, to calculate capital gains. This means that, if you buy cryptocurrency on multiple occasions throughout the year, you’ll have to figure out an average price for that cryptocurrency.

Crypto Capital Losses

Just like you only pay tax on 50% of your capital gain, you can also only offset 50% of your capital losses. This means that if you sell (or part ways with) a cryptocurrency at a time when its market value is lower than what you paid for it, you will be left with a capital loss. You can apply 50% of this capital loss to offset your tax burden. If you don’t have any other capital gains to counteract that year, the CRA allows you to carry these capital losses forward for the next three years.

Crypto Income Tax

There are many scenarios that could arise from handling cryptocurrency that could result in taxable income. Unlike capital gains, where only 50% of your profit is subject to taxation, crypto activities that are subject to income tax are treated like any other source of income. Your standard federal and provincial income tax rates will apply.

How to Calculate Crypto Income Tax

The way that you calculate crypto income tax will depend on your individual situation. If you make $45,000 a year from your full-time job and an additional $10,000 a year in crypto trading, then you will need to report a yearly income of $55,000 to the CRA

Crypto Tax Breaks

The fact that only 50% of capital gains resulting from cryptocurrency are taxed is a tax break. Other than this, all Canadians receive up to $13,808 of tax-free income, and can have their crypto charity donations deducted from their taxes.

How to avoid paying Crypto Taxes

Scenarios, where you won’t have to pay taxes on your cryptocurrency are rare, but they do exist. For example, you won’t need to pay any tax when you move cryptocurrency between your own wallets, or when you donate crypto to charity. You also do not need to pay income tax on any cryptocurrency that is gifted to you, provided that it falls under the gift allowance.

How to report Crypto Taxes

Like all things money management, it’s very important that you keep great records of all your cryptocurrency transactions. You won’t need to remember any special dates in order to properly report your crypto activity—it will follow the same CRA calendar year of January 1st to December 31st. This means that you’ll have to report all crypto income—including both income and capital gains—by April 30.

Best Crypto Tax Software in Canada

If you’re used to using an online application to help you with your taxes and would like to do the same for your cryptocurrency, then we have good news for you—there are some options on the market. Ones worth checking out include CryptoTaxCalculator, Koinly, and Crypto.com.

The Bottom Line

Nothing is certain in life other than death and taxes, and cryptocurrency certainly goes out of its way to prove this to be true. Thankfully, the tax rules around cryptocurrency aren’t so hard to understand, once you get the hang of it. Just keep them in the back of your mind so that you aren’t greeted by any surprises come tax time—or find yourself a great accountant.

Frequently Asked Questions

The simple act of buying and keeping crypocurrency on its own is not taxable. However, once you sell, trade, or otherwise profit off of your cryptocurrency, you will be taxed for either business income or as capital gains. The system under which you’re taxed will be evaluated by the CRA on a case-by-case basis. Your accountant can help you parse out and understand what your cryptocurrency transactions fall under in the eyes of the government.

Yes. In fact, the only situation in which you don’t have to pay taxes on cryptocurrency is when you are holding crypto or if you have been gifted crypto in some capacity (provided that it is under the CRA gift limit which is usually around $15,000 or $16,000). When you sell crypto, you will be taxed either as business income or as capital gains, depending on the circumstances of your transaction.

Yes. In fact, depending on the extent of your actions, you may be engaged in business activity in the eyes of the CRA and will be taxed accordingly. Both mining (i.e., creating new crypto to enter into circulation) and staking (earning rewards as a result of holding certain types of cryptocurrency) will be considered taxable income by the CRA. Whether or not the crypto earnings generated from mining or staking will be considered business income or capital gains will be evaluated on a case-by-case basis. Both methods of engaging in cryptocurrency are historically used to generate passive income, which will always be taxed.

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