Cryptocurrency investing in Canada comes with tax obligations. Profits from crypto transactions, whether buying, selling, and trading, are subject to capital gains. Capital gains or losses must be reported on your individual income tax return. The Canada Revenue Agency (CRA) requires detailed records of transactions are kept, including dates, purchase prices, selling prices, and all expense, to ensure compliance with tax regulations. Special attention is needed for tax implications related to mining, staking, and receiving cryptocurrency as income. Staying informed about evolving tax regulations is crucial for Canadian cryptocurrency investors to ensure compliance and avoid penalties.
What is cryptocurrency?
The CRA considers cryptocurrency as a type of virtual asset that is protected using cryptography. They are a type of digital currency that allows people to make payments directly to each other through an online system. Cryptocurrencies have no legislated or intrinsic value, rather they are simply worth what people are willing to pay for them. People also invest in them with the intention of benefiting from appreciation in their value, as the value of cryptocurrencies fluctuate up and down, it has similarities to stock investment or currency exchange rate.
Is Cryptocurrencies taxable in Canada?
When you sell (dispose of) your cryptocurrency, there can be tax implications. CRA treats cryptocurrencies as property – a commodity, gains from which are taxed as either capital gain or business income. If you experience a loss, you end up with a capital loss or business loss. It is important to establish whether your transactions are part of a business or investment(capital gain), while 50% of your gain is taxable, business income is 100%taxable. It may be difficult to know whether the gain will be considered capital gain or business income as CRA determines that on a case-by-case basis. Some transactions by the same investor can be considered a capital gain and others are business income.
Business income or capital gain
Here is some guidance into situation where CRA would consider a cryptocurrency transaction as a business income:
· You conduct crypto activity for commercial reasons.
· You promote a product or service.
· You show that you intend to make a profit.
· Your crypto activities are regular or repetitive.
· You usually own the cryptocurrency for a short period of time.
· Cryptocurrency transactions form a part of your ordinary business.
The more active you are in buying and selling cryptocurrency and the more profit you make, the more likely your crypto profits will be considered business income as opposed to capital gains.
As noted above, if your crypto income is treated as business income, the profit is taxed at 100%, the tax rate will vary depending on your total income from all sources and your tax bracket.
On the other hand, if your profit is treated as capital gain, only 50% of the profit will be added to your income from other sources. The transactions that can be considered a disposition in Canada include:
· Selling crypto to CDN$.
· Swapping crypto for another crypto.
· Spending crypto on goods and services (bartering).
· Gifting crypto.
The taxes you pay will be on the net profits. Calculating your profit is straightforward; profits = selling price in CDN$ - adjusting cost base. Using adjusted cost basis method allows you to amend your cost basis to reflect how much a given capital asset actually cost you by adding fees related to selling and purchasing your crypto, this will also include accounting and legal fees.
Tax-free Crypto transactions
There are transactions that does not trigger a taxable event in Canada:
· Purchasing and holding crypto with fiat.
· Receiving crypto as a gift.
· Moving crypto between wallets you own.
· Created a Decentralized Autonomous Organization (DAO).
· Rise and fall in the price of cryptocurrencies.
Minimizing taxes on Cryptocurrencies in Canada
Tax on profits from trading in crypto currencies is unavoidable. However, there are some legal options to minimize your tax obligations:
· Registered retirement plans – Hold your crypto ETFs in your TFSA or RRSP to eliminate or defer taxes until a later date, potentially benefiting from a lower tax bracket.
· Hold on to your crypto – Avoid selling, spending, or gifting your crypto to maintain tax-free status. Work out a proper plan as to when to offload your assets and spread them over multiple tax years, where possible.
· Do not promote – Avoid marketing yourself as a crypto investor, do not promote products or services related to cryptocurrency, and do not invest for commercial purposes, this way you will be taxed as an individual investor rather than a professional investor, thus your gain will be taxed as capital gain.
· Use losses to offset gains – By properly planning your when to sell and which crypto-asset to dispose of, you can use the losses from underperforming crypto to reduce your gains from well performing assets. Losses can potentially reduce your past and future tax liability.
Keeping books and records
If you acquire or dispose of cryptocurrencies, you have to keep adequate books and records to support each single transaction. This applies to individuals and businesses.
The records and information you should keep are:
· The number of units and types of crypto asset for each transaction.
· The date and time of each transaction.
· The value of the crypto asset in Canadian dollars at the time of each transaction.
· A description of the nature of each transaction and the other party to the transaction – even if it is just their crypto-asset address.
· The addresses associated with each digital wallet used.
· The beginning wallet balance (and its cost) and ending wallet balance for each crypto asset for each year.
· You should always print reports and store them on a regular basis, do not depend on your crypto exchange to save those records for you.
You should also keep receipts associated with managing your tax affairs, such as accounting and legal costs, and third-party software costs. Different types of software are available to track cryptocurrency trades and keep records.
If any transactions occur on a crypto asset exchange, you should keep exchange records including trade ledgers (buy, sell and swaps), transfer ledgers (deposit and withdrawals of crypto-assets and fiat) and records supporting any other types of transactions that took place on the exchange. Crypto-asset exchanges have different standards for the kinds of records they keep and how long they keep them.
The CRA is currently updating the Guide for cryptocurrency users and tax professionals. Please refer to it regularly for updates.
Information on how to report your income or capital gains from cryptocurrency transactions in your tax filing can also be found in related CRA guides T4002 Self-employed Business, T4037 Capital Gains.
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