Are you wondering how to file your cryptocurrency taxes in Canada? Then you are in the right place. Filing crypto taxes can be somewhat complicated if you don’t know where or how to get started.
Professional crypto traders and those that treat cryptocurrencies as a fun hobby submit to one responsibility: taxes.
Cryptocurrency investment or trading in Canada is governed by different sets of regulations, and each player in the industry is expected to comply with the laid down rules and regulations as stipulated by the Canada Revenue Agency.
Thankfully, this handy guide will bring you up to speed with how cryptocurrency is taxed and how to accurately file your cryptocurrency taxes.
Let’s dive in!
The Canada Revenue Agency (CRA) is the tax authority in the country. It administers tax laws for most provinces and territories for the social and economic development of the country.
According to the CRA, cryptocurrency is not regarded as a legal tender, but Canadians are expected to report taxes during tax time when they dispose of their cryptocurrencies.
The CRA treats cryptocurrency as a commodity. And like any other investments, traders and investors are liable to two types of taxes: capital gains and income tax. Capital gains or losses is as a function of how much was made as profit or how much you lost in a crypto transaction when you sell them, while income is money that’s earned.
In essence, when you make a profit or incur a loss, the event needs to be reported even if it is a conversion from one cryptocurrency to the other.
Here are some factors that the CRA uses to determine whether your cryptocurrency will be taxed:
Additionally, The CRA treats cryptocurrency as a barter transaction when used to pay for goods or services. For clarity purposes, a barter transaction is a situation when goods/services are exchanged without the recourse to a legal currency.
And since the Canadian Revenue Authority considers cryptocurrency as a commodity, it counts as a bartery in this case.
The tax authority mandates taxpayers to use any reasonable method in determining the value of cryptocurrency taxes. According to the CRA, the fair market value of a cryptocurrency is the most taxpayers should pay for.
So, you should keep record of all your cryptocurrency transactions, as you will need the information to prove your case to the CRA if necessary.
Consistency is also important in reporting taxes. Whether you use multiple exchanges or just a single exchange, you should consistently apply the fair market value of a cryptocurrency when computing your tax returns.
In Canada, the CRA understands that some cryptocurrency activities can generate both income and capital gain taxes depending on the activity. The tax authority also treats crypto activities “as a business” or simply “as a hobby”.
So, if you are involved in cryptocurrencies as a hobby, all your cryptocurrency transactions will be treated as capital gain or loss.
The tax authority treats cryptocurrency as a capital gain when:
When reporting your taxes during tax time, you need to list all the capital gains you have made from cryptocurrency transactions. And remember, the CRA taxes only 50% of gains.
You can also use this capital gain to offset any losses incurred from selling or disposing of your cryptocurrencies. And in cases where the losses are more than the capital gains, you can carry forward the losses to the next tax season.
You can keep an accurate track of your crypto gains or losses with crypto portfolio tracking software.
The way you report your taxes during tax time is largely dependent on whether the taxes you are reporting is from a business income or a capital gain. The following criteria are what the tax authority uses to categorize cryptocurrency as income tax:
The tax authority views crypto trading, mining operations, and exchanges as a crypto business. But if you are still in the early stages of developing your crypto business, you may skip reporting your taxes this coming tax season until the following year’s taxes.
Sometimes, a single transaction is not enough for the CRA to categorize them as income tax. The activities need to be repeated to attract the attention of the CRA.
If you are not sure whether your involvement in cryptocurrencies is regarded as income tax, you can engage a tax accountant who is familiar with crypto taxes in Canada for clarity, as some situations need a professional touch.
Tax payers are expected to use the average cost or adjusted cost basis (ACB) to calculate their capital gains, which means you have to average your purchase cost if you buy similar cryptocurrencies in a year.
For example, let’s say you buy Solana (SOL) at three different times and Bitcoin (BTC) at five different times, and then dispose of all the cryptocurrencies within the same year, the adjusted cost basis would be calculated for the three Solana purchases for SOL and the five Bitcoin purchases for BTC.
Under the Income Tax Act, there are some crypto activities that are tax-free. These include:
The CRA doesn’t expect you to report any tax event for simply holding cryptos in your wallet, but you may incur a tax if you are involved in any of the following:
To clarify the crypto tax situation in Canada a bit more, here’s how the CRA taxes the following cryptocurrency situations:
Day trading means the practice of buying and selling cryptocurrency for a short period of time to make a profit. The CRA treats day trading as a commercial income.
So, if you are involved in cryptocurrency day trading, you will need to report your net profits minus your net losses on your income tax return.
The Canada Revenue Authority does not charge a tax for buying cryptocurrencies. However, if you buy and hold cryptocurrencies in your wallet for a long period of time, it is important to keep the accurate date and value of the cryptocurrency at the time of purchase.
You will need the value and the date at the time of purchase to calculate the crypto cost basis if you decide to sell the cryptocurrency in the future.
Crypto mining is the practice of using a computer to mathematically solve complex puzzles and also authenticate cryptocurrency transactions. Cryptocurrency mining is subject to capital gains tax for those who are involved in mining as a hobby.
However, in this case, the CRA doesn’t allow deductions and the cost basis is zero. For those mining cryptocurrencies as a business, the CRA treats such cases as inventory. This requires filing your taxes during a tax season using the fair market value.
We mentioned earlier that the CRA doesn’t tax those who simply hold cryptocurrencies in their wallets. So, if you buy and hold cryptocurrencies in your wallet, the CRA will not come after you for not reporting crypto taxes, until when you decide to sell them.
You are also not expected to pay any taxes when you transfer your cryptocurrency from one wallet to the other or from one exchange to another.
However, make sure you keep records of all your transfers because you will need them when you decide to sell the cryptocurrencies or calculate the cost basis.
When you sell or convert your cryptocurrency into a fiat currency, say from BTC to CAD, you are expected to report this event as a capital gain tax in your tax filing.
Each selling event should be listed separately. Remember, you will need the original value of the crypto and the sale value to calculate the cost basis.
If you earn cryptocurrencies for work done online, you will need to report the event as income. Whether it’s from airdrops or forks, earning cryptocurrencies is treated as a taxable event in Canada.
During tax season, you will need to report the value of the cryptocurrencies earned as of the time you earned them
Like we mentioned earlier, using cryptocurrencies to purchase goods/services is considered by the CRA as bartering. You will need to keep accurate records of the value of the transaction paid for with cryptocurrencies to enable you to report taxes appropriately.
When you sell your cryptocurrency, say Bitcoin, for another cryptocurrency, such as Ethereum, this event or situation is taxed as a capital gain. The value of the cryptocurrency being sold will help you calculate the cryptocurrency’s value at the time of sale.
In Canada, crypto taxable events for business purposes are reported using the form T2125. The form T2125 is popularly known as the Statement of Business or Professional Activities.
But for personal transactions, the CRA requires you to use Schedule 3 (Capital Gains or Losses) to report taxes. So, check with your province or territory to know which one is applicable to you.
Please note that tax breaks are also available for all Canadian investors explained below:
Crypto-to-crypto trades (trading one crypto for other cryptocurrencies) are treated as a disposal in Canada. As such, you will incur a capital gain/loss tax for the event.
So, make sure you keep an accurate date of the disposal, as well as the original amount you bought the tokens and the amount you dispose of the assets.
In Canada, the tax year begins from January 1 to December 31st for individuals. You should be mindful of April 30th, as it is the deadline for filing your taxes. But if you are self-employed, the tax authority gives you until June 15 to file your tax returns to avoid penalties.
There are several tools on the internet that you can use to report taxes in Canada. Some of the best ones include:
There shouldn’t be any confusion when it comes to crypto taxation, as the tax authority has a clear guideline on how crypto taxes should be reported.
Generally, Canadian taxpayers are required to pay business income or capital gains tax after mining or selling cryptocurrencies. The percentage of the profits that the tax authority collects depends on whether the profit was classified as income tax or capital gains.
Keep in mind that you may also be required to pay provincial and territorial taxes in addition to the federal taxes imposed by the Canada Revenue Authority.
In Canada, each province and territory have their unique tax rates and bracket; so be sure to check with your province or territory to get the accurate local tax rates.
The easiest way to ensure that your involvement in cryptocurrency does not negate tax laws is to have experts or license accountants complete your taxes.
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Of course, trading and investing in cryptocurrency is legal throughout Canada.
In Canada, the Canada Revenue Agency (CRA) considers cryptocurrencies as regular income, which is subject to income tax.
If you live and trade cryptocurrencies in Canada and you default on your tax payment liability, the tax authority will fine you or you will pay a late filing penalty. Additionally, if you don't file your cryptocurrency taxes, your action can be viewed as deliberate defaulting, which can trigger penalties.
Yes, the CRA has a robust mechanism for tracking tax defaulters. So, if you are a crypto trader or investor, it is important to accurately report your taxes during tax time to avoid incurring a penalty.
For most taxpayers, the payment deadline to file your tax returns is April 30. However, if you are self-employed or you have a common-law partner, the tax authority expects you to report your taxes latest June 15.
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