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Whether you’ve gained or lost in your crypto exploits, there are tax consequences to consider. Here’s what you need to know about crypto taxes including what type of tax you need to pay, how to figure out what you owe and which crypto-related expenses can be treated as tax deductible.
This guide summarizes some of the CRA’s most important rules on cryptocurrency taxation. We’re not tax experts, and this information should not be taken as professional advice for your own circumstances. Crypto tax is an evolving space, and regulations may change over time. Consult a tax professional, or check out the CRA’s guide to cryptocurrencies to make sure you’re managing your taxes correctly.
Cryptocurrency is considered a digital asset by the CRA. It’s not recognized by the Canadian government or courts as legal tender (real money) like Canadian dollars, US dollars, euros etc. As an asset, cryptocurrency is taxed much like an investment. What matters are your profits and losses from buying and selling crypto, not how much the crypto you’re holding is worth.
Cryptocurrency becomes taxable when you dispose of it. This happens when you:
Example: If you buy 1 Bitcoin for $10,000, then sell it later for $25,000, you’ve earned a taxable profit of $15,000. But if the price of Bitcoin drops and you sell it for $7,000 instead, you can treat the loss as tax deductible, either as a business loss or a capital loss depending on the circumstances.
Example: Say you have 1 Bitcoin worth $10,000, but you think the value will go down and would rather invest in Ethereum instead. You find a buyer who is more optimistic about the future value of Bitcoin, and the two of you agree to exchange your single Bitcoin for 26.88 of his Ethereum (at $1,500 per ether, this amounts to $40,320 total). By losing a $10,000 asset to gain a $40,320 asset, you’ve made a total of $30,320. Even though no government-recognized currency like CAD or USD was used in the exchange, the amount you’ve earned is still subject to tax law.
Example: You have 1 Bitcoin in your crypto wallet, but you want to cash in and use the funds to help cover some unexpected expenses. You trade your Bitcoin for $10,000 and transfer the funds to your bank account. The dollar value of your crypto at the time you trade it — in this case, $10,000 — is subject to tax law.
Example: You run an electronics retail and repair shop and have decided to begin accepting Bitcoin as payment. A customer buys a $3,000 home entertainment system and pays with Bitcoin. Because cryptocurrency isn’t recognized as legal tender, the CRA views a transaction like this as “bartering.” Tax laws for bartering stipulate that the value of the goods or services you’re giving up must be included with your income if you would normally provide these goods or services in the course of your profession.
As an electronics store owner, you normally sell audio and visual equipment, so this transaction is taxable. Though no legal tender was exchanged, you must still declare $3,000 as part of your business income. (If, for some reason, you would normally have to report customer payments as capital gains instead of business income, then you’d have to continue doing so when accepting payment in cryptocurrency. However, most of the time, crypto revenue will count as business income not capital gains.)
The type of tax you’ll pay depends on whether your crypto earnings are classified as business income or capital gains.
If your crypto earnings don’t fall within the scope of “business income,” then you must treat these earnings as capital gains on your personal income tax return. However, there are some exceptions to this rule which are explained in more detail below. Here’s how it works:
For example, if you buy or otherwise obtain 1 BTC worth $10,000, then sell or spend it when it’s valued at $20,000, you’ve realized a capital gain of $10,000. You would only have to pay income tax on 50% of this, or $5,000.
When filing your individual tax return, see if you can apply any of the following crypto-related tax deductions to reduce your taxable income:
Fees for buying and selling cryptocurrency are not tax deductible, because these are used to calculate the adjusted base cost of assets, which can reduce your taxable capital gains.
If you sell or exchange cryptocurrency in the course of business, any resulting profits are treated as either business income or capital gains. This is true regardless of whether you run a cryptocurrency-centred business or some other type of enterprise.
The line between personal and business activities is fuzzy in some places. For example, both individual investors and crypto businesses can engage in many of the same activities like mining, trading and lending. The CRA does not specifically define the phrase, “in the course of business.” Rather, the CRA looks for signs that you may be carrying on a business to determine if your crypto profits were earned from business activity.
Note: If you’re in the process of setting up a business, the CRA likely won’t count it as a business for tax purposes.
If your crypto is classified as inventory for your business, then your earnings count as business income. If your crypto is classified as business capital, then your earnings count as capital gains. How do you determine whether you use crypto as inventory or as capital?
Crypto may be business inventory if any of the following is true:
If you determine that the cryptocurrency you’re holding is inventory, then you must report its value on your next business tax return. The value is based on the cost of your crypto (in Canadian dollars) when you acquired it, so it’s important to keep careful records of all your crypto transactions. You will also need to report any earnings or losses from disposing of crypto as part of your business income.
Crypto may be business capital if any of the following is true:
If you determine that the cryptocurrency you’re holding is capital, then you must report any capital gains or losses on your next business tax return.
However, this may not always be the case, and there are other factors that contribute to the CRA’s assessment of your crypto activities (like the factors mentioned above). We recommend getting professional advice from a crypto tax specialist to find out how your situation should be classified.
When cryptocurrency is accepted as payment for goods or services, the CRA doesn’t recognize it as a transaction involving legal tender. Instead, it’s considered “bartering.” You’re only taxed on bartered transactions if the goods or services that you give up are what you would normally provide in the regular course of business. Therefore, businesses that accept crypto as payment for products or services must treat it as business income.
The value of any crypto payments you receive is based on the fair market value of those payments at the time of sale. So, if you agree to receive 0.0167 Bitcoin as payment for a purchase that costs $500 total, you would count that $500 sale as part of the business income you declare on your next business tax return. GST/HST would also be based on the fair market value.
(If, for some reason, you would normally have to report legal tender payments as capital gains instead of business income, then you would similarly report crypto payments as capital gains. However, for most businesses, crypto payments count as a form of business income, not capital gains.)
If you pay employees in cryptocurrency, they must report the equivalent value in Canadian dollars as income on their personal tax returns. As the employer, you’re still responsible for making sure the right deductions are made including CPP, EI and so forth. Keep a record of the value of each crypto payment you make to employees including the equivalent value in Canadian dollars at the time of payment. When creating T4 slips, add these Canadian dollar amounts into employees’ total incomes.
Employees are responsible for reporting any capital gains or losses that come from their crypto fluctuating in value. For example, if you pay an employee $1,000 worth of Bitcoin and she trades, exchanges or spends it when its value has risen to $1,400, she must declare a capital gain of $400 on her personal tax return.
Many business expenses are tax deductible. This includes certain expenses related to using crypto to pay employees, transact with customers and handle other business matters. Remember to claim the following deductions on your business tax return:
In Canada, you only pay tax on 50% of any realized capital gains. This means that half of the money you earn from selling an asset is taxed, and the other half is yours to keep tax-free.
To calculate your capital gain or loss, follow these steps:
This amount counts as part of your income and will be taxed accordingly. The tax bracket you fall into is based on the amount you earn, the province or territory in which you live and how many tax deductions you can get your hands on.
Remember that you’re only taxed on crypto assets you dispose of. So, when calculating capital gains, don’t factor in the buying or selling costs of any cryptocurrency you’re holding onto.
No. The CRA has created the Superficial Loss Rule (Section 54 of the Income Tax Act), which makes it illegal to claim capital losses for an asset within 30 days of when it was sold. This is designed to prevent people from buying an asset, selling it to claim a capital loss and then rebuying it shortly afterwards.
Here’s how the Superficial Loss Rule breaks down for crypto:
|If you buy crypto and resell it within…||And then buy back the same crypto within another…||Can you claim a capital loss?|
|0-30 days||0-30 days|
|0-30 days||31+ days|
|31+ days||0-30 days|
|31+ days||31+ days|
You’re taxed on money earned from investing in cryptocurrency, not on the cryptocurrency itself. So, you don’t have to pay tax on crypto you’re simply holding onto. But the moment you dispose of crypto — either by sale, trade, exchange or some other way — you have to factor into your taxes whatever was earned or lost in Canadian dollars. Depending on the situation, this will count as a capital gain, a capital loss or business income.
In Canada, chain splits and hard forks — such as the Bitcoin Cash (BCH) hard fork in 2017 — do not automatically trigger tax. You don’t have to pay tax simply for owning crypto, even if your assets increase after a hard fork or similar event. You only pay tax when you dispose of crypto by sale, trade, exchange or some other method.
If you run a business that uses crypto, bear in mind that any changes to the value of your crypto count as changes to your inventory. You’ll need to make sure these changes are factored into the inventory value you report on your next business tax return.
You may be able to claim a capital loss or business loss if your crypto is permanently lost or stolen in some way. This includes losing evidence of ownership or losing an unreplaceable private key. However, if an item is replaceable, it likely won’t qualify as a loss for tax purposes.
To calculate earnings and losses for both personal and business tax returns (and audits), you need to keep detailed records of all your crypto transactions. You can use software to track your trades and automatically generate reports on profits and losses. Some programs integrate with popular crypto exchanges to make your job even easier.
If you’re a miner, you should keep the following records:
Check out the CRA’s guide on keeping records for more information.
If you repeatedly fail to report $500 or more of your income to the CRA, you may end up being slapped with a penalty of 10% on the unreported amount. This applies to individuals, businesses, corporations and trusts. A “repeated failure” means a failure to report all your income more than once in a 4-year period.
If you haven’t reported all your income to the CRA — whether intentionally or by accident — you can avoid prosecution and maybe even some of the penalties and interest fees you owe by reporting through the CRA’s Voluntary Disclosure Program. Learn more here.
There several simple things you can do to make sure you stay compliant with the CRA’s regulations:
Tax law can be complicated and confusing, and cryptocurrency taxation rules are still evolving. We highly recommend getting help from a trained tax professional to make sure you stay up-to-date and compliant with all the CRA’s rules. Be aware that not all tax professionals are familiar with handling crypto, so you should narrow your search to those with experience in digital assets.
Disclosure: At the time of writing, the co-author holds ADA, ICX, IOTA and XLM.
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