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Crypto and Canadian tax: an introduction

Updated: Apr 11

Introduction


One of the most common questions I get is whether cryptocurrencies are taxed in Canada.

The shortest answer I can give is - yes.


But...


Like most tax matters the answer isn’t actually that simple. Once we move past that ‘yes’ more important questions arise- what exactly gets taxed, when does it get taxed and how does it get taxed?


I noticed a lot of information online pertaining to our neighbors to the south and unfortunately IRS cryptocurrency rules are VERY different from CRA cryptocurrency rules.


The goal of this post is to answer some of the most frequently asked questions and provide the Canadian perspective.


Questions like:


1. How does the CRA actually treat crypto?

2. How does crypto get taxed in Canada?

3. How do I calculate my crypto gains for Canadian tax purposes?

4. How do I report crypto activity on my Canadian tax return?

5. How much tax will I pay on my crypto?

6. What if I don’t trade much, but I generate crypto returns in other ways?

7. What if I lost money in crypto transactions?

8. What happens if I don’t report any crypto to the CRA?


I hope you find it helpful!


The background


Not surprisingly, the Canadian tax authorities and lawmakers are not yet up to speed with this fast-growing industry. This is the case across the globe- not just here. Because cryptocurrency is relatively new on the financial scene, we don’t have dedicated laws and regulations for crypto, blockchain or DeFi- YET! (it’s coming). Slowly.


Slowly can be annoying but it can also be an advantage when planning your investment.


To make matters even trickier for early investors, (such as yourself)- there’s little precise guidance from our tax authority - the Canada Revenue Agency (CRA). All we have to go by is a general guide on crypto currencies. On the ground- it’s a whole different ballgame.


You can read the official guide here.


So how does the CRA actually see crypto?


In the eyes of the CRA crypto is not a currency at all…it’s a commodity.


So any common sense or intuitive idea you may have about treating ETH or BTC in a way similar to how we treat traditional foreign currencies like the USD or Euro, are not applicable when it comes to tax in Canada.


As I mentioned, Canadian tax authorities treat crypto as a commodity or security. They call it a ‘digital asset’ and expect taxpayers to apply the existing rules for other such investment assets. It is comparing apples to oranges, but in the eyes of the CRA, and as far as tax is concerned crypto is treated not unlike a stock for example.


How does cryptocurrency get taxed in Canada?


In brief- ANY gains from ‘digital assets’ (like crypto) may be subject to income tax.


Much like traditional securities, if you acquire crypto at one price and later sell it at a higher price, the gain you’ve realized is taxable. It seems pretty simple, but there are two extremely important details here that can make a world of difference.


1. Only realized gains will be taxable. In other words if your crypto asset has skyrocketed but you haven’t sold it and are just keeping it, you might have massive gains on paper, but you haven’t actually triggered, or “realized” the gain. Such unrealized gains are not taxable.


2. The term “sell” should be taken in a very general and wide sense. There are many things you could do with your crypto which in the eyes of the CRA would constitute a “sale” and thus trigger taxes. For example, trading it for another digital asset, or using it to pay for a service would all be considered a ‘sale’.


How do I calculate my crypto gains for Canadian tax purposes?


Your basic formula for a gain = you take the sale price that you received for (insert asset), subtract from it the original cost that you paid, and presto, you’ve got your gain. Right?


Well not when it comes to crypto...


If you buy one crypto asset using fiat (such as Canadian dollar), and later sell that same asset for Canadian dollars, determining the cost and sale price is relatively easy.


But what if instead you acquired the asset by trading other crypto for it? And what if later you exchanged it for yet another digital token? What’s your cost? What’s your sale price?


Needless to say, tracking transactions and values becomes very important, and challenging, especially if you are a frequent trader, across multiple exchanges.


There are some tools and apps out there that help you pull some of the relevant pricing from your wallets and exchanges. A word of caution, however: the tools are not designed with the Canadian tax rules in mind. In fact, to the extent that they provide any tax reporting data at all, most are typically made primarily for the US market and with an eye to the US compliance landscape- a vastly different one from what we see in Canada.


How do I report cryptocurrency activity on my Canadian tax return?


There is no separate tax return for crypto assets. Any gains, income (or losses) from your crypto activity gets included in a regular tax return. This will either be your personal tax return (T1) or your corporate tax return (T2) if you are trading or doing some other crypto activity through a corp.


Depending on what kind of crypto activity you are doing - long term investment with occasional sales, day-trading, or something entirely different (such as mining) - there will be additional schedules that need to be prepared and attached to your return.


If you hold crypto assets on an exchange outside of Canada, there can be additional returns required as well.


How much tax will I pay on my crypto?


The answer to this one is very much - it depends. Because there is no separate return and no separate tax on crypto (for now at least), the income from your crypto activity will be combined with all of your other sources of income. So your tax bill will vary depending on your overall income, deductions and credits and how the income is structured (business income vs. personal).


What if I don’t trade much, but I generate crypto returns in other ways?


There are of course other types of crypto activity beside trading digital assets. One that has been around for some time is mining. But the possibilities are expanding rapidly as the DeFi space expands and diversifies. Harvesting governance or incentive tokens and DeFi lending or staking income are just two of the most common that we come across.


Each activity and even separate transactions or events within a type of activity may have a different tax treatment. For example, the crypto deposited into your wallet from mining will be taxed as regular or business income, while the yield from staking may be a capital gain or ordinary income, which can make a big difference to your tax bill. You’d have to have an advisor run the numbers and go with the best scenario in your specific case.


What if I lost money in crypto transactions?


If you sell (or trade or in some other way dispose) of your crypto at a value below your original cost, you will have realized a loss. Crypto losses are reportable just like crypto gains. You will usually get to reduce your crypto gains by your losses and only pay tax on the net amount. If you have an overall loss this year, you may be able to reduce your other (non-crypto) income and save some tax. But there are times when you’ll have to wait until you have a gain in the future to use this loss, and other times where you never get to claim it.


What happens if I don’t report any crypto to the CRA?


I get this one a lot! “I have crypto but I’m hiding it”. The reality is that unless you plan on sitting on your crypto forever, you will at some point have to fulfill your taxpayer obligation and report it. My approach is to be well prepared, rather than evasive- after all it’s your hard-earned money we are talking about here.




For the record…


Canadians failing to report income (including any realized gains) from any source to the CRA can face significant penalties and interest in addition to the tax owing. The longer the delay in filing, reporting or paying taxes, the higher the overall tax cost. In fact after a few years the interest and penalties can easily exceed the original tax on the crypto income, thus multiplying the cost to the investor. Not worth it if you ask me.


In situations where the authorities believe the failure to report crypto income was done knowingly or through willful negligence, the taxpayer could face even higher penalties and possibly even criminal charges. Definitely not worth it.


Yes, the CRA is not yet as proactive in this space as our neighbors to the south, but they are already performing audits and legislating that off-ramping platforms disclose investor information, especially when crypto currencies are converted to fiat.


The smart route is to plan ahead.


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About the author: Yuriy Lozynsky is a CPA and the founder of Deixis, a Canadian accounting firm specializing in cryptocurrency tax compliance.

www.cryptoaccountantcanada.com


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The information provided in this blog is general in nature and solely for educational purposes. Viewers use and implementation of the information comes at their own risk and is their own responsibility.


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