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.
What's in this guide?
- How does the CRA treat cryptocurrency?
- When do I have to pay taxes on cryptocurrency?
- How is cryptocurrency taxed for individuals?
- How is cryptocurrency taxed for businesses?
- How do I calculate capital gains or losses on cryptocurrency?
- When is cryptocurrency not taxable?
- What about chain splits and hard forks?
- What if my cryptocurrency is lost or stolen?
- What records do I need to keep?
- Cryptocurrency tax FAQs
How does the CRA treat cryptocurrency?
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.
When do I have to pay taxes on cryptocurrency?
Cryptocurrency becomes taxable when you dispose of it. This happens when you:
Sell or gift cryptocurrency
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.
Trade or exchange cryptocurrency for legal tender or another cryptocurrency
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.
Convert cryptocurrency to a government-issued currency like Canadian dollars
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.
Buy goods or services with cryptocurrency
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.
How is cryptocurrency taxed for individuals?
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:
- A capital gain occurs when you earn money from selling or exchanging crypto that has increased in value. In Canada, you’re only taxed on 50% of realized capital gains. (Capital gains are “realized” when you dispose of an asset and “unrealized” when you hold onto it.)
- A capital loss occurs when you lose money from selling or exchanging crypto that has gone down in value. Capital losses are tax deductible and can be used to reduce the income tax you owe the CRA.
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.
Cryptocurrency tax deductions for individuals
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 paid for professional investment advice
- Crypto donations to charities
- Moving expenses to work, run a business or study full-time (some retailers accept payment in crypto and legal tender like Canadian dollars)
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.
How is cryptocurrency taxed for businesses?
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.
- You buy or sell for commercial reasons
- You go about activities in a “business-like” way, (i.e. you use business plans, acquire capital, handle inventory etc.)
- You advertise a product or service
- You show an intent to earn profit, even if you don’t expect to earn anything in the short run
- You perform commercially viable activities regularly or repeatedly
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.
Business income versus capital gains
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:
- You trade it with customers
- It’s a source of revenue for your business
- You acquire it with the intent to dispose of it shortly afterwards
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:
- You use it to develop your business
- You use it to sell your core products or services
- You acquire it with the intent to hold onto it
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.
How to tell whether you're an investor or professional traderInvestors typically acquire assets with long-term financial goals in mind. On the other hand, professional traders typically buy and sell assets in the short run for profit. Because traders buy and sell more frequently, they are more likely than investors to be classified as operating a business for tax purposes.
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.
Accepting cryptocurrency as payment from customers
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.)
Paying employees in cryptocurrency
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.
Cryptocurrency tax deductions for businesses
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:
- The Canadian-dollar value of gross salaries paid to your employees (do not include business owners’ salaries, business owner withdrawals, direct wage costs and subcontracts.)
- The Canadian-dollar value of income deductions such as CPP, EI and workers compensation
- Fees for using the services of crypto tax specialists, crypto accountants and other similar professionals in the course of business
- Meal and entertainment expenses that were paid for using cryptocurrency, as long as these expenses are “allowable” according to the CRA’s rules.
How do I calculate capital gains or losses on cryptocurrency?
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:
- Determine the adjusted cost base of your crypto assets. This is what you paid to buy your cryptocurrency plus related costs such as transaction fees, brokerage fees and commissions.
- Subtract the adjusted cost base from the Canadian-dollar value for which you exchanged or sold your crypto.
- Divide the resulting figure in half.
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.
Can I temporarily dispose of crypto to avoid capital gains tax?
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|
When is cryptocurrency not taxable?
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.
What about chain splits and hard forks?
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.
What if my cryptocurrency is lost or stolen?
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.
What records do I need to keep?
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.
- Date of the transactions.
- Receipts of purchase or transfer of cryptocurrency.
- Value of the cryptocurrency in Canadian dollars at the time of the transaction.
- Digital wallet records and cryptocurrency addresses.
- Description of the transaction.
- Exchange records.
- Accounting and legal costs.
- Software costs related to managing your taxes.
If you’re a miner, you should keep the following records:
- Receipts for the purchase of cryptocurrency mining hardware.
- Receipts to support your expenses and other records associated with the mining operation, such as power, mining pool fees, maintenance costs, etc.
- Mining pool details and records.
Check out the CRA’s guide on keeping records for more information.
What if I fail to report my crypto earnings?
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.
Tips for keeping up with your tax obligations
There several simple things you can do to make sure you stay compliant with the CRA’s regulations:
- Do your own research. Take a look at the CRA’s guide for cryptocurrency users and tax professionals to make sure you don’t miss any rules or guidelines that apply to your situation.
- Plan ahead. Consider the purpose and use of buying and selling crypto before moving ahead with a transaction. Identify whether your activity could be classified as business-like or personal. Figure out whether you’ll earn or lose money from a transaction, and make sure you know how to treat this on your next tax return.
- Keep detailed records. Keep track of all your crypto transactions. This will make it easier to search for any information you need to find come tax time or in the event you get audited. Use a crypto tracking software, or see if you the exchanges you’ve used allow you to export your transaction information.
- Look for deductions. Are you eligible to claim any deductions for expenses related to your crypto transactions, such as transaction fees, commissions, brokerage fees or the costs of getting advice from a crypto tax professional.
- Disclose, disclose, disclose. Don’t assume that transactions made with bitcoin and other cryptocurrencies are untraceable – they’re not. And don’t even consider “forgetting” to disclose the details of your crypto transactions. The government is getting increasingly watchful over the crypto industry, and you may be audited to check if you’ve been compliant.
Get help from a crypto tax expert
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.
Cryptocurrency tax FAQs
Disclosure: At the time of writing, the co-author holds ADA, ICX, IOTA and XLM.
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