Taxing Crypto in Canada
IMPORTANT NOTE: This article discusses Canadian Taxation matters and may not be applicable to those outside of Canada. Personal circumstances play a significant role in determining your taxation situation and should be discussed with a tax professional to determine your unique situation. This information is provided for informational purposes only and does not constitute tax advice.
SECOND IMPORTANT NOTE: Be careful where you get your tax advice from. Rules in the US are quite different from rules in Canada, and most stuff you find on the internet is written from a US perspective. Also, don’t take tax advice from a plumber! Just because a mate told you what he does, it doesn’t mean that it is correct. Even if someone files a tax return and CRA “accepts” the return, that doesn’t mean that CRA has agreed with their position. Unless they have been audited and came out clean an assessment means nothing! Plus, their circumstances may be quite different from yours.
One of the attractive factors of crypto currency is that it is not controlled by the federal government. But despite popular notions, it is far from anonymous and governments still have the right to tax and regulate it when used within their borders or by their tax residents.
Canada taxes its residents on their World Wide Income, including gains made trading cryptocurrency. Even if your crypto is stored in a cold wallet with the keys locked in a vault in Luxembourg, CRA is still entitled to tax it! We do not advocate hiding assets from the government or failing to report income on your tax return.
Canada treats crypto assets similar to commodities or stocks. How Canada taxes your crypto income will generally depend on whether you are considered to be an investor or a trader.
Investors tend to be buy and hold people - they are looking for income from the capital invested (such as rents, dividends and interest - but this isn’t available for crypto assets) or gains from eventually selling the asset that has appreciated over a longer time frame. Investors are taxed when they sell their investments, and gains are included in income at 50% of the gain (capital gains rules). If the investment goes up or down in value there is no tax event until the coins are sold (or declared void). If you hold an asset for ten years and it goes up 200% in that time, the entire gain of 200% will be included in your income (at 50%) and taxed at your current tax rates in the year of sale.
Many people claim that if you hold an asset for at least one year it is automatically taxed as capital gains (investor), but this is not necessarily true. It is all about your intent when you purchased the asset. While 1 year is a good benchmark, you could have a capital gain on an asset sold in under a year, and trading activity on an asset held for more than a year. While capital (investor) gains are taxed at a lower rate than trading income, there are more restrictions. Capital Losses (if you sell your asset for less than you bought it for) you can only offset that loss against capital gains - you can not offset it against regular income.
If you are investing through a corporation the capital gain is considered to be income from property and not only is the income not eligible for the reduced small business tax rate, it is taxed at the highest rate and a portion of that tax can be refunded when you actually distribute the income by way of dividend.
Traders tend to buy and sell more frequently and their income is made by trying to time the market by buying low and selling high. It doesn’t really matter how long you hold the asset for - your intent in buying was to sell for as fast a buck as possible. If the asset drops in value and you hold for a year before selling, it may still be trading income even though you held for over a year. Any assets you hold at the end of the financial year may be valued at either Lower of Cost or Market (LCM), or Fair Market Value (FMV). Once you have chosen a method you must use it consistently year after year - you can swap each year depending on what is better for you. LCM is usually the most beneficial as you don’t have to pay taxes on unrealized gains, but get to take the loss on unrealized losses immediately. Gains and losses from trading activity is taxed as income (100%) from self-employment (individuals) or active business income (corporations). If you have losses from trading they can be offset against other income (including capital gains) and carried backwards and forwards where appropriate.
Determining your Cost Basis
Whether you are classified as an investor or a trader you will need to keep meticulous records. When you sell you will need to calculate your cost base in Canadian dollars. So while you don’t have to pay tax when you buy an asset, it will have an impact on the tax you pay when you sell. Crypto assets are separated - you can’t merge different types of cryptocurrencies together. For example, Bitcoin is one asset, Etherium is a separate asset, and US Stable Coin yet another. Each asset creates a sort of pool - when you sell an asset you calculate the cost based on the average cost of all the assets in that pool. For example: You bought 1 bitcoin at C$10,000 and another at C$20,000. You sell 1 and the cost is calculated as C$15,0000 (total cost of $30,000 divided by two units). If you sale price was C$50,000 then the gain is C$35,000.
If you hold multiple wallets then you may be able to argue that each wallet is a different pool (and even a different purpose - investor vs. trader), but if you frequently transfer between them then you have probably polluted that distinction and turned the combined portfolio into a trading portfolio with one pool for cost purposes.
Mining Bitcoin is treated as business income. The coins you earn by mining are taxable in the year you earn them and the fair market value on that day becomes the cost price in your portfolio.
Transferring Crypto Currencies between Wallets
When you transfer crypto currencies between wallets that you own this is a neutral event from a tax perspective. You have not bought or sold anything - just moved its location (it’s like transferring money from TD to CIBC). Transfers may incur transaction costs which are treated like bank fees and may be deductible immediately. However, frequent transfers between accounts may pollute the cost basis or investor status of a wallet.
Buying, Selling and Trading Crypto Currencies
If you exchange or trade one currency for another this is considered a sale and a purchase. Any gain or loss of the sale of the outgoing currency must be calculated using the fair market value at the time of the trade, and the cost of the incoming currency will be the same amount. Buying crypto from a third party has no tax implications directly - the cost must be recorded and used when you sell. But if you receive crypto in exchange for services then the value of that service is taxable income (even though you didn’t get paid in fiat currency).
Spending crypto is considered to be a sale and a gain or loss needs to be calculated. If you spend crypto on other business expenses then these will be deductible in the same way as if you spent fiat currency.
Other tax issues
CRA does not currently accept crypto currencies as a form or payment. Your tax bill is still payable in fiat currency. And if you have to convert crypto to fiat to pay that tax bill, that event is a sale and may create more tax to pay the following year! If you accept crypto currency as a form of payment in your business, you will still need to charge and collect GST/HST/PST as if the payment was paid by fiat currency. As above, you still need to pay CRA or your Provincial tax authority in fiat currency.
If you emigrate from Canada while holding any crypto currencies you will need to include these in your final tax return as if you had sold them (known as a “deemed disposition” and sometimes referred to as an “exit tax”). If you donate to charities and have large unrealized crypto investing gains consider donating these directly to your charity of choice (don’t sell and then donate fiat) will result in avoiding the capital gain AND getting a tax deduction for the FMV donated (you get a double tax benefit).Crypto currencies are classified as a foreign asset and therefore if you have more than C$100,000 cost in crypto currencies you will need to file form T1135.
For more information on CRAs position please consult their Guide for cryptocurrency users and tax professionals.