Just like a hockey player navigating a puck through defenders, handling cryptocurrency taxes in Canada can feel like a fast-paced game on the ice. Sometimes, you might feel like Wayne Gretzky, seeing the play before it happens, and other times,... more like a rookie at his first game.
In this comprehensive guide, we’ll equip you with a clear understanding of your crypto tax obligations and strategies for minimizing your tax liability.
First thing to know: crypto is regarded as a commodity and is overseen by the Canada Revenue Agency (CRA) for taxation purposes. Transacting in crypto can face either capital gains tax, typically applicable to occasional investors, or business income tax, for those conducting crypto business activities. Each of these categories has distinct tax rates and reporting stipulations, making differentiation vital.
Crypto Capital Gains Tax in Canada
Capital gains tax applies when an individual sells, trades, gifts, or uses crypto, resulting in a profit. To calculate capital gains, the following key components must be considered:
- Proceeds of Disposition: This represents the amount received from the crypto transaction, such as the sale of crypto for fiat currency or the fair market value of crypto used for purchasing goods or services.
- Adjusted Cost Base (ACB): The ACB is the total cost associated with acquiring the crypto, including the purchase price, transaction fees, and any other expenses directly related to the acquisition.
- Capital Gain (or Loss): The capital gain is determined by subtracting the ACB from the proceeds of disposition. If the result is a positive value, it represents a capital gain; if negative, it signifies a capital loss.
Taxable Portion of Capital Gains
In Canada, only 50% of the capital gains are taxable. This means that if an individual realizes a capital gain of $10,000 from a crypto transaction, they will include only $5,000 (50% of the gain) in their taxable income for the year.
Marginal Tax Rate
The taxable portion of capital gains is added to an individual's total income for the tax year. The applicable marginal tax rate is then applied to this combined income to determine the actual tax owed. Canada employs a progressive tax system, meaning that the rate at which capital gains are taxed depends on an individual's total income.
Reporting and Compliance
Individuals must report their capital gains from crypto transactions on their annual income tax return. Schedule 3 - Capital Gains is used to calculate and report these gains. Accurate record-keeping is vital, as the CRA may request supporting documentation in case of an audit. Details such as transaction dates, amounts, and counterparties should be meticulously recorded.
Crypto transactions that are tax-free in Canada
Crypto transactions that trigger no taxable event in Canada:
- Simply purchasing and holding crypto with fiat.
- Receiving crypto as a gift.
- Moving crypto between wallets an individual owns.
- Created a Decentralized Autonomous Organization (DAO)
Business Income Tax
Crypto transactions that are conducted as part of a business or professional activity are subject to business income tax. In such cases, the entire profit generated is considered taxable income. Business income tax rates may differ from the capital gains tax rates. Business crypto transactions that are subject to income tax should be reported with Form T2125.
What Falls Under Business Activities?
To determine whether crypto transactions constitute a business activity, the CRA considers factors such as the frequency and volume of transactions, the degree of organization and systematization, the intention to make a profit, and the individual's expertise in crypto trading on a case-to-case basis. Sometimes, an individual transaction may be considered business income, while other transactions by the same investor may be considered a capital gain.
Examples of crypto transactions that could be considered business income include:
- Mining crypto.
- Staking rewards.
- Referral bonuses.
- Selling an NFT you've created.
Most DeFi transactions would be considered business income as these are conducted for commercial reasons.
Tax Implications for Professional Traders
Professional or day traders in crypto are subject to business income tax. In this scenario, 100% of the profits from cryptocurrency trading are taxed as business income based on their fair market value at the time of receipt. Professional traders cannot benefit from the 50% capital gains tax rate.
Tax Planning Strategies for Cryptocurrency Investors
To optimize tax outcomes and reduce their tax liability, crypto investors in Canada can employ various tax planning strategies. These strategies are designed to make the most of tax-advantaged accounts and deductions available under the Canadian tax system.
Use Tax-Advantaged Accounts
Tax-Free Savings Account (TFSA)
The TFSA is a popular tax-advantaged account in Canada that allows individuals to earn income and realize capital gains tax-free. Crypto investments held within a TFSA can grow tax-free, and any capital gains or income generated from these investments are not subject to taxation upon withdrawal.
- Contributions: The TFSA has an annual contribution limit, which varies by year. For 2023, the contribution limit is $6,500. Unused contribution room can be carried forward to future years.
- Withdrawals: Withdrawals from a TFSA are tax-free and can be made at any time. The withdrawn amount, along with any associated contribution room, is added back to the individual's TFSA limit in the following year.
Registered Retirement Savings Plan (RRSP)
The RRSP is another tax-advantaged account that allows individuals to save for retirement while reducing their current tax liability. Contributions to an RRSP are tax-deductible, and the investments within the RRSP grow tax-deferred until withdrawal.
- Contributions: The annual RRSP contribution limit is determined based on an individual's earned income from the previous year, up to a maximum limit. For the 2023 tax year, the RRSP contribution limit is whichever is lower: 18% of the individual's earned income in the previous year or $30,780.
- Withdrawals: Withdrawals from an RRSP are considered taxable income and are subject to income tax. However, individuals may have a lower tax rate in retirement, making RRSP withdrawals more tax-efficient.
Take Advantage of Tax Deductions and Credits
Capital Losses Offset Gains
Individuals can use capital losses from crypto transactions to offset capital gains from other sources such as stocks or real estate, but cannot offset against income from other sources, such as employment income. This strategy can help reduce your overall tax liability for the year. The 50% rule for capital gains equally applies to capital losses. This means an individual can only offset half of his net capital loss in a given tax year. It's important to note that capital losses can be carried back to offset gains from the three preceding tax years or carried forward to offset gains in future years.
The Superficial Loss Rule
In order to avoid wash sales, the CRA has the superficial loss rule, which stipulates that if an individual sells and then purchases assets of a similar nature within a 30-day period, they are unable to use these capital losses to offset their capital gains.
Claiming Trading Expenses
Individuals engaged in crypto trading as a business may be eligible to deduct certain expenses related to their trading activities. These expenses can include trading platform fees, internet costs, and research expenses. Proper record-keeping is essential to support these deductions.
Reporting Foreign Income and Assets
Crypto holdings in foreign exchanges or wallets must be reported to the CRA. Failing to report foreign income and assets can result in penalties. The CRA has implemented measures to track international crypto transactions, so individuals should ensure compliance with foreign reporting requirements.
Treatment of Airdrops and Forks
Forks and airdrops are unlikely to be taxed as income on receipt, but individuals should pay Capital Gains Tax when they later sell coins or tokens received from an airdrop or hard fork.
Treatment of Donations
Due to the classification of crypto as a commodity rather than currency by the CRA, donating crypto differs in its tax treatment compared to cash donations. When you make a crypto donation, the CRA perceives it as a disposal of an asset, leading to tax implications. If the value of your crypto has appreciated between the time of acquisition and the donation, you will be subject to Capital Gains Tax on the donated amount.
Tax on Crypto Mining Income and Staking Rewards
If the CRA classifies your crypto mining endeavors as a hobby, you won't be subject to income tax when you initially acquire mined coins. However, you will be liable for capital gains tax when you eventually transfer, sell, exchange, spend, or gift these mined coins.
Since the initial cost basis of mined coins is zero, any gains obtained from a disposition are categorized as capital gains for tax purposes.
The CRA hasn’t released guidance on staking rewards. It’s reasonable to assume that crypto earned from staking will be subject to income tax based on its fair market value at the time of receipt.
In addition, disposals of staking rewards are subject to capital gains tax. You’ll likely incur a capital gain or loss depending on how the price of your crypto changed since you originally received it.
Tax on Lost and Stolen Crypto
The CRA has not given guidance on whether lost and stolen crypto can be deducted on your tax return.
However, the CRA does allow taxpayers to deduct losses from capital properties in the case of theft. It’s likely that stolen cryptocurrency can be deducted under the same rules.
How are NFTs Taxed in Canada?
Although the CRA has not provided explicit guidance on the taxation of NFTs, it is a reasonable assumption that they are categorized as digital assets, similar to other cryptocurrencies.
Consequently, NFTs are likely to be classified as capital property under Canadian law, making them subject to the same tax regulations as other forms of crypto.
The specific tax treatment of an NFT will hinge on the nature of your interactions with it. It is essential to note that merely minting or purchasing an NFT does not trigger a taxable event.
Deadline for Reporting Crypto Taxes
In Canada, the tax year runs from January 1 to December 31. Typically, the deadline for reporting taxes to the CRA is April 30 after the end of the tax year. The deadline to file your taxes if you or your spouse or common-law partner are self-employed is June 15 every year.
Compliance and Record-Keeping
Compliance with crypto tax regulations is critical to avoid potential penalties and audits by the CRA. To ensure compliance, individuals should:
- Keep detailed records of all crypto transactions, including dates, amounts, counterparties, wallet addresses, transaction types, exchange or trading platforms, and transaction fees for at least six years.
- Maintain records of their ACB for each cryptocurrency.
- Report capital gains and losses accurately on their income tax return, using Schedule 3 - Capital Gains when applicable.
- Report foreign income and assets, including foreign crypto holdings, as required by the CRA.
- Seek professional tax advice and guidance if their crypto transactions are complex or if they have concerns about their tax obligations.
One tool that can significantly simplify this process is Bitwave, a crypto tax platform designed to streamline back-office operations.
With Bitwave, you can integrate the blockchain into your traditional accounting system, automating mark-to-market processes, simplifying quarter-end procedures, and avoiding manual errors.
Ready to simplify your crypto tax management? Request a demo with Bitwave today.
Disclaimer: The information provided in this blog post is for general informational purposes only and should not be construed as tax, accounting, or financial advice. The content is not intended to address the specific needs of any individual or organization, and readers are encouraged to consult with a qualified tax, accounting, or financial professional before making any decisions based on the information provided. The author and the publisher of this blog post disclaim any liability, loss, or risk incurred as a consequence, directly or indirectly, of the use or application of any of the contents herein.
