If we could all agree on one thing, this is it: the world of decentralized finance, mostly known as DeFi, and all the vocabulary associated with it can be confusing. Whether you love it or hate it, it doesn’t stop everyone from talking about cryptocurrency exchanges, Web3, non-fungible tokens (NFTs), crypto wallets, and all other things that seem out of this world.
So even if you are clueless about all of these but have decided to delve into investing in cryptocurrency or NFTs, or you seem to understand how it works, chances are, you don’t have a grasp on how to file taxes on your crypto transactions in Canada. Many people find cryptocurrency tax to be a confusing subject, so you are not alone. This guide will help you understand how to file your crypto tax in Canada.
Crypto tax In Canada
If you are still unsure whether the Canada Revenue Agency (CRA) taxes your crypto gains, the answer is yes. You need to pay tax on crypto gains in Canada. Cryptocurrency transactions are complex, and determining if you need to pay income tax or capital gains tax can be pretty confusing. You could use a crypto taxes software to help you.
The Canada Revenue Agency has specified that cryptocurrency is a digital asset treated as a commodity for tax purposes. While people use cryptos to facilitate payments and trades, it is not a ‘legal’ tender, at least not yet. For this reason, when you use your cryptocurrency to purchase goods or services, it is considered a barter trade. That is when you exchange a commodity for another commodity. The CRA reviews specific crypto transactions to classify your income as a business income or a capital gain.
What triggers a crypto tax
If you know how taxation works for financial assets, such as stocks, you can apply some of that knowledge to crypto tax. However, if you have no idea what can trigger a crypto tax, here’s how it works. Since the CRA considers cryptocurrency a commodity, you would not owe taxes for just buying them and storing them in your crypto wallet. However, when you sell a cryptocurrency or transfer it to someone as a gift, this can result in a tax payable.
To avoid any doubt, the following crypto transactions can lead to you owing or paying crypto tax:
- Exchanging cryptocurrency asset for another cryptocurrency asset
- Selling a crypto asset to another party
- Converting your cryptocurrency to cash
- Using crypto as a mode of payment for goods or services
- Giving out crypto as a gift
There are two primary reasons people own cryptocurrency assets: capital investment or earning profit through short or long-term gains. Usually, people who purchase crypto assets for profit engage in frequent crypto trading activities.
Depending on your cryptocurrency transactions and activities, the CRA requires you to pay crypto tax either as a business income tax or a capital gains tax.
How to value your cryptocurrency assets
When you make business income or capital gains on your cryptocurrency transactions, you need to value your crypto assets correctly before reporting your cryptocurrency gains. As a cryptocurrency business, any crypto assets you hold may qualify as inventory and need to be valued appropriately using a consistent method every year. The CRA has recommended that you calculate the value of your crypto inventory using either:
- the lower value of, the purchase cost of each crypto asset in your inventory, or the fair market value (FMV) of each crypto asset at the end of the year or,
- the fair market value for all crypto assets in your inventory at the end of the year.
The fair market value of your cryptocurrency is the ongoing market rate for the crypto asset; this is how much you would either sell the cryptocurrency for or purchase it.
If you purchase cryptocurrency as a capital asset and not for commercial purposes, the value of your cryptocurrency is simply the adjusted cost base (ACB). For tax purposes, the adjusted cost base of your crypto asset is how much it cost to purchase the asset less any expenses you incurred when buying the crypto asset. Eligible expenses include commissions or other purchase fees you paid to a cryptocurrency exchange when buying your crypto asset. The value of your cryptocurrency will determine how much business income or capital gains you need to report for the applicable tax year.
Cryptocurrency tax on personal capital gains
The Canada Revenue Agency taxes only half of your capital gains at your personal marginal rate. This also applies to capital gains on cryptocurrency transactions. The CRA assesses crypto activities on a case-by-case basis to determine if you have made a capital gain or business income. If your crypto transaction is not for commercial purposes, it will be considered a personal disposition resulting in capital gains.
Suppose you purchase cryptocurrency as capital property for investment purposes and dispose of your crypto asset later. In that case, this can lead to either a capital gain or a capital loss. A capital gain or loss on a crypto exchange or disposal is the difference between the fair market value (or sale price) of the cryptocurrency asset and the adjusted cost base. Remember, that means how much you bought the crypto asset plus any expenses incurred to acquire and sell the asset.
In simple terms, if you sell your cryptocurrency for a higher price than you bought it, after accounting for buying and selling costs such as commission and fees, then you have a capital gain on your crypto sale. On the other hand, you have a capital loss if you sell your crypto asset at a lower price than the purchase price.
If you make capital gains, you will be required to pay tax on 50 percent of your gains. The tax you pay will depend on your federal and provincial marginal tax rate. Likewise, if you make a loss on your crypto exchange, you can claim a capital loss on 50 percent of your loss. Note that your allowable capital loss claim can only be applied to capital gains from your other crypto exchanges or investment assets and cannot be used to reduce your income tax from your other sources of income.
Reporting cryptocurrency tax on capital gains
Currently, there is no formal tax slip or form exclusively for cryptocurrency. As more people get involved with crypto exchanges, the CRA will likely create more formal guides and forms for cryptocurrency tax. In the meantime, the responsibility to calculate your crypto capital gains or losses is on you as the taxpayer.
Here’s a simple example showing how to calculate your capital gains and estimate your tax payable:
Personal capital gains
If you bought a cryptocurrency asset for $2,000 and sold it for $10,000 after incurring selling commission fees of $100, this will result in capital gains of $7,900 ( $10,000 – $100 – $2,000).
You will be required to pay capital gains tax on only $3,950 (50% of $7,900). If your federal and provincial marginal tax rate is 15%, your cryptocurrency tax will be $592.5 (15% x $3,950).
Personal capital loss
Suppose you also had a $3,000 loss on one of your crypto transactions, in this case, you can claim $1,500 (50% x $3,000) on your crypto capital gain of $3,950. Your taxable capital gains will be $2,450 ( $3,950 – $1,500).
Using your marginal tax rate of 15%, your tax payable will now be $367.5. By claiming your capital loss on your capital gains, you will pay $225 ($592.5 – $367.5) less tax on your crypto revenue.
If your allowable capital losses are more than your capital gains in the current tax year, you can apply them against your previous gains in the past three years or carry them forward and apply them on capital gains in future years.
Reporting capital gains and losses
You will need to report any type of capital gain, including capital gains from cryptocurrency to the Canada Revenue Agency using the Schedule 3, Capital Gains (or Losses) form. If you have a taxable capital gain, you will fill this amount in line 12700 of your income tax and benefit return.
You can also file your taxes using online certified tax filing software, like TurboTax, which automatically calculates how much tax you need to pay based on your crypto tax report. If you'd rather use H&R Block, their premier package will let you claim capital gains and losses.
Cryptocurrency tax on business income
Depending on the type of crypto transactions you make, you may be required to report your crypto gains as business income. If your crypto activities were carried out commercially or for business purposes, you would need to report any gain as business income. In this case, your total gains will be taxed, unlike crypto capital gains which only half of the gains are subject to tax.
You need to assess your crypto transactions and determine if you performed them in a business-like manner. Generally, a business-like manner means you carried out your crypto trading like a regular business. For example, if you created a business plan or bought crypto mining assets and crypto coins as inventory, you are considered to have a cryptocurrency business.
For example, due to the frequency of their trades, most crypto miners and traders are considered to operate a cryptocurrency business. If they make any crypto gains, 100 percent of the gains will be subject to tax as business income.
Also, if you carry out crypto transactions while selling or promoting a crypto product or service with the intent to make gains, your cryptocurrency transactions will be deemed as a business, and your gains will be taxed as such.
Reporting cryptocurrency tax on business income
Like cryptocurrency tax on capital gains, when you make business income from crypto transactions on a cryptocurrency platform, you need to report this income to the CRA. The only difference is that you must report the total amount you have gained as income. This amount will be subject to tax, and your tax payable will depend on your current federal and provincial marginal rate.
Here’s how your business income from a cryptocurrency business can get taxed:
Suppose the total amount you made in the year for frequently trading cryptocurrencies was $10,000, and you spent a total of $4,000 to purchase the cryptocurrency assets you sold. In that case, your business income from cryptocurrency will be $6,000 ($10,000 – $4,000).
You will need to report this amount when filing your tax. However, because the income you have made is business income, you may be able to reduce your business income tax. You can allowable business expense deductions for the year.
Suppose you have a marginal tax rate of 15% and you have no business expense to claim; the tax calculated on your business income from cryptocurrency exchange will be $900 (15% x $6,000).
You can file your business income tax using form T2125 for Statement of Business or Professional Activities or form T4002 for Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Software for creating cryptocurrency tax reports
While some crypto exchange companies issue a report or statement that shows your crypto transactions and any income or capital gains you have made for the year, this may not be the case for all exchange companies.
For example, if you carry out your crypto transactions using the Wealthsimple Crypto exchange, you will receive a tax document called “Realized Gains and Losses” to help you break down your crypto transactions. The tax document will help you calculate the cryptocurrency capital gains and income you need to report. In addition, if you file your tax through their tax platform, they help you do the crypto tax calculation automatically.
If you do not use the Wealthsimple crypto exchange platform, what other software can you use to calculate your cryptocurrency capital gains? Well, you can also calculate how much crypto capital gains you need to report using crypto tax software companies such as koinly, cryptotaxcalculator, cointracker, or cryptotrader.
Most crypto tax platforms have free options that offer limited services and paid options that help you generate a comprehensive crypto tax report. However, the popular crypto exchanges crypto.com tax provides a free service that enables you to create a crypto tax report showing your transactions history, crypto gains or losses, income, donations, payments, gifts, and donations.
When you use cryptocurrency tax software to generate a capital gains tax report, you need to upload your crypto transactions report as a CSV file or integrate your cryptocurrency exchange platforms. It is crucial to take security measures when granting integration access to your crypto exchange account to avoid fraud or theft of your crypto assets.
Crypto tax companies do not file your crypto taxes for you. You will need to use the crypto tax report they have generated to file your taxes yourself using the paper form or online through one of Canada’s free tax softwares.
Tax on cryptocurrency mining
Generally, to own cryptocurrency, you either have to purchase it through a crypto exchange or mine it. You will need to report all the income earned from your crypto mining.
If you engage in crypto mining as a hobby or for pleasure, the CRA will tax any gains you make as capital gains. However, if your crypto mining is frequent and done commercially, the CRA will tax your income as business income. If you have a registered cryptocurrency corporation, the CRA will tax your income at the applicable business tax rate. As an individual, sole proprietor, or partner in a company, the CRA will tax your business income at your marginal tax rate.
Tax on gifted crypto
If you give a cryptocurrency such as Bitcoin to someone as a gift, the CRA considers this to be a disposition of your crypto asset. As such, you will need to pay capital gains tax. When calculating your capital gains, this would be the difference between the adjusted cost base of your crypto asset, usually the purchase price plus any cost of purchase, and the market value of the cryptocurrency when it is gifted.
On the other hand, if you receive a cryptocurrency as a gift, you will not be expected to pay tax on the gift. However, if you dispose of a gifted crypto asset, your capital gains will be the entire fair market value of the cryptocurrency. This is because it cost you nothing to get the cryptocurrency. Only half of this amount will be subject to tax at your marginal tax rate.
Tax on cryptocurrency exchanges
When you purchase a cryptocurrency using a legal tender such as the Canadian dollar, you do not have to pay taxes on your purchase. However, suppose you use one cryptocurrency such as bitcoin to purchase another cryptocurrency like litecoin. In that case, the CRA will classify the transaction as an exchange of commodities, and as such, you will need to pay taxes on any gains.
Depending on the nature of the transaction, your tax can be calculated as a capital gains tax or income tax. The cryptocurrency tax is calculated based on the adjusted cost basis and the fair market value of your bitcoin cryptocurrency, which is the crypto asset you owned and disposed of.
Tax on non-fungible tokens (NFTs)
The Canadian Revenue Agency has not released any guide on filing taxes for NFTs. However, like cryptocurrency, NFTs may be considered capital property. Sooner than later, if not already happening, many Canadians will start looking for a guide on reporting taxes for NFTs.
When you buy an NFT, you would not be required to pay taxes; however, a disposition of an NFT either through a sale, exchange, or gift can result in capital gains tax or business income tax. If the disposal of an NFT leads to a capital gain, then half of this gain will be taxable. If it results in business income, the total income will be subject to tax.
Keeping records for crypto exchanges
When filing your income tax and benefit returns, you do not need to submit the supporting documents for your cryptocurrency exchanges or disposition. However, because the CRA can request these documents anytime, you should keep all supporting statements and reports. Failure to support your tax claims and refund may result in penalties or tax repayments to the CRA.
The Canada Revenue Agency recommends keeping all supporting tax documents for up to six years from the tax filing year. Your supporting documents need to be original copies. The crypto report you keep should show transaction dates and descriptions, receipts, digital wallet records, cryptocurrency addresses, any accounting and legal costs, crypto mining pool details and records, etc.
Cryptocurrency transactions are sometimes complex, and calculating the tax you need to pay when you dispose of a crypto asset can be confusing. You can use crypto tax software that allows you to integrate your cryptocurrency exchange and calculate your crypto gains for tax purposes.
It is essential to capture your cryptocurrency tax as accurately as possible to avoid owing the CRA after completing a tax assessment for your tax return. You may need to use the services of an accountant to assist you in filing your crypto tax if you are not able to figure it out yourself.
Frequently asked questions about crypto tax in Canada
Are cryptocurrency movements between my wallets taxable?
Technically, when you move cryptocurrency from one wallet to another, the cryptocurrency still belongs to you, and hence you will not be required to pay any tax on the movement.You will only be required to pay taxes on cryptocurrency transactions that involve selling or gifting a crypto asset, exchanging cryptocurrencies, converting cryptocurrency to cash, or using cryptocurrency to pay for goods or services.
Can I claim crypto capital losses on my employment income
No, you can not reduce your employment income for tax purposes using a capital loss from the disposition of your cryptocurrency. You can only use n allowable capital loss from a cryptocurrency sale to reduce a taxable capital gain from your investment assets.
Will I pay cryptocurrency tax if I invest through a TFSA or RRSP?
The CRA allows only eligible investment assets in your Tax-Free Savings Account (TFSA) and registered retirement savings plan (RRSP). You can not invest in cryptocurrency through your tax-free savings account or your registered retirement savings plan.
However, you can buy crypto exchange-traded funds (ETFs) in your TFSA and RRSP through brokerages in Canada. The gains on crypto ETFs in your RRSP are not taxed, provided you do not convert them to cash and withdraw the money. For TFSAs, your gains from crypto ETFs are not subject to tax on withdrawals.
Examples of crypto ETFs you can purchase are Fidelity Advantage bitcoin ETF (FBTC), Purpose Bitcoin ETF (BTCC), Evolve Bitcoin ETF (EBIT), CI Galaxy Bitcoin ETF (BTCX). These ETFs track certain coins and you would not own the actual coins.
How does the government view cryptocurrency?
It is important to note that the Canada Revenue Agency (CRA) considers cryptocurrency as a commodity for the purposes of the Income Tax Act. Indeed, the CRA does not consider cryptocurrency as legal tender. Legal tender is a government-issued currency such as the Canadian dollar, which is a fiat currency. The CRA bases its recognition of cryptocurrencies on the unanimous definition of them as digital assets, sometimes also referred to as “crypto assets.”
What is a cryptocurrency transaction?
To speak of a transaction is to define how an individual uses their cryptocurrencies. Generally speaking, the possession and holding of the cryptocurrency is not taxable. However, the following is taxable and you must report it:
- The sale or donation of cryptocurrency;
- The exchange of cryptocurrency that also includes obtaining another cryptocurrency;
- The conversion of cryptocurrency into a currency, such as Canadian dollars;
- Using the cryptocurrency to purchase goods or services.
How do you report your cryptocurrency earnings?
First, you should know that the CRA distinguishes between business income and individual capital gains when it comes to taxation. It's important to realize that a day trader can classified as a business instead of an individual.
In general, this seems to be more-or-less clear to the CRA, who mention on their site that some exceptions may apply. You trade cryptocurrency as part of a business plan. Or you trade cryptocurrency every day for the purpose of making a profit. In either case, you most likely classify yourself as business income in the CRA's eyes. Be aware that the Canada Revenue Agency will tax 100% of your earnings at your marginal tax rate.
Capital gains for Individuals
There is an important distinction between business income and capital gains. The CRA will only tax individuals at their marginal rate on only 50% of the capital gains. Owning cryptocurrency is not taxable in the eyes of the CRA. It is the trading and transactions that are taxable as they involve taxable items in the eyes of the law.
How are GST and PST calculated on cryptocurrency?
If you are a business owner engaging in crypto transactions either through your services or through your products, you should know that the GST/PST is calculated based on the fair market value of the cryptocurrency at the time of the exchange.