Search

How to lower your crypto tax bill: key deductions against crypto income in Canada

Transacting in crypto is not free. In some cases, the transaction costs or gas fees can be substantial. And sometimes, they are large enough to wipe out the return from an otherwise profitable investment strategy.


There are other costs associated with crypto. Costs like interest on crypto loans, subscription fees for DeFi investment tools and apps, and other less obvious things like high-speed internet, electricity, or even accounting fees.


Crypto income is taxable in Canada, which means there are legitimate deductions that can lower your tax bill. However, it is essential to know what you can deduct, when, and how. Knowing where you stand will help you avoid reassessments and penalties from the CRA.


This Blog will cover the following:

Deducting Gas Fees

Crypto Business Deductions

Deducting DeFi Fees

Deducting ‘real world’ Expenses

Deducting Mining Expenses


Deducting gas fees

Transaction fees like gas fees are charged on most crypto transactions and can add up.

Sometimes you can claim them as an expense on your tax return and offset your crypto income, thus reducing the tax bill.

But not always.

It comes down to two questions:

1. What transaction was the fee paid for?

2. Is the transaction part of your crypto business?


Let's dig in.


Crypto business deductions

Whether your crypto activity amounts to a business for Canadian tax purposes comes down to the facts of your specific situation and whether or not you can defend your position with the CRA.

Generally, when your crypto activity is treated as a business, your income is fully taxable as business income (rather than being only partially taxable as capital gains).


Read my previous blog on this topic.


If you have a crypto trading business, the gas fees on most of your transactions can be deducted as an expense against your business income. You do not need to distinguish between fees paid on buying versus selling an asset or fees incurred on staking, rebalancing your yield farming position, claiming reward tokens, etc.

You can deduct more expenses when you have a crypto business, and it is easier to claim these deductions.


Not a crypto trading business?

If your crypto activity does not constitute a business for Canadian tax authorities, only half of your gains from trades and sales are taxable. However, deducting your gas fees is also less straightforward. You need to trace the fees to the related transactions, and the treatment will depend on the type of transaction this was.


Transaction fees you incur on buying an asset cannot be claimed as an expense in the year you bought it; instead, the fees get added to the price you paid for the asset and became part of its cost. I’ve discussed the importance of determining the correct cost of your crypto in a previous blog. (read it here)


Fees incurred on a sale of a digital asset would be taken off the price you received, thus decreasing your capital gains and lowering the related tax.


In reality, most buy/sell transactions for many crypto investors will be swaps (where you exchange one crypto asset for another) as opposed to purchases using fiat or sales for fiat. Because cryptocurrencies aren’t considered currencies for Canadian tax purposes, swaps are treated as barter transactions. In other words, a swap is a simultaneous sale of one asset and purchase of another asset. But the gas fee on the swap does not come split up between these two sides of the same coin - it’s just one fee.


The CRA has no specific guidance on treating the gas fees on swaps. A reasonable approach would be to add half of the fee to the cost of the new asset and use the other half to reduce the proceeds on the asset given up in the swap. Again, this only matters if you treat your crypto trading profit as capital gains. If you have business income, you’d deduct the entire gas as a business expense.


Fees on other DeFi transactions


You may also generate income from other forms of crypto activity, not necessarily trading. TheDecentralized Finance (DeFi) space has expanded and diversified dramatically over the past two years. You may be staking your crypto and claiming the reward tokens, providing liquidity and yield farming, lending your crypto and generating interest, or even earning crypto rewards for participating in a DAO or for gaming (play-to-earn).


If these types of transactions are part of your crypto business, then the income they generate is taxed as business income alongside any profit from trades. Therefore, any related gas fees are fully deductible as a business expense.


If your crypto activity does not amount to a business for tax purposes, your returns from most of these other types of crypto activity would be treated as “other investor income” for Canadian taxes and would be fully taxable (not just half-taxable, like capital gains). Gas fees you incur to earn this “other income” would be deductible as a related expense and reduce your taxes.

If your crypto activity is considered a business for tax purposes, you can write-off more expenses- such as subscriptions, professional fees, and a reasonable portion of the home, phone, and internet costs.

Other crypto-related expenses


Gas fees are often the most common and significant cost incurred in crypto trading and DeFi. However, you may have some other expenses as well. Here are some common examples:

Subscriptions

You may be paying subscription fees to tools and applications that help you analyze, track and monitor your investments. If your crypto activity is a business for tax purposes, you can deduct these subscription costs as a business expense for the year; otherwise, you will not be able to deduct them.

Interest

If you are paying interest on a loan, whether a crypto loan or a traditional bank loan, you will be able to take a deduction for the interest on the loan. This deduction applies whether your crypto activity is a business or just a passive investment for tax purposes. Just make sure you used the loan proceeds for your income-generating crypto activity and can prove it by tracing the funds accordingly.

Other 'real-world’ expenses

What about your phone bill, high-speed internet connection costs, even your home rent and utility costs?


Generally, you cannot write any of this off if you are not running a business (as CRA understands this). If your crypto activity is a business, you can take a reasonable deduction for these costs. For instance, if you run your crypto business from your home, you’ll be able to deduct a portion of your home costs (rent, utilities, insurance, etc.) based on square footage used essentially for work.


Similarly, if you use your phone and internet for both your commercial crypto activity and personal stuff, you’ll need to carve out the business portion and only deduct that piece.


Remember, you need to have documentation to support the expenses and the allocation to business usage.


Professional fees

You might be paying a CPA to help you with your taxes. If you are not running a business, you can still take a deduction for the tax preparation fees if you are reporting investment income, whether from DeFi or traditional finance.


If you hire other professionals - bookkeepers, lawyers, etc. - you will probably not get the deduction as a passive investor. But then again, if your crypto activity is at a level that requires lawyers and bookkeepers, it’s doubtful you’re in the ‘passive investor’ boat. You’ve likely crossed over to the “crypto business’ category. And if that’s the case, you can deduct the professional fees as a business expense.


Crypto mining expenses


If you are mining crypto, the first question is whether you are doing this as a commercial activity (i.e., a business) or as a hobby. You can read more on this in my previous blog.


Your mining will be considered a business for tax purposes in most cases. As a result, you’ll be able to deduct a lot of your costs as business expenses for the year.


This includes the costs already discussed above:

  • gas fees for your crypto transactions

  • interest on a loan used for the business

  • Professional fees (e.g., to hire accountants, bookkeepers, lawyers, etc.)

  • A reasonable portion of your phone, internet, and home expenses

  • Subscription fees for apps and services used for your mining business

Two costs are especially important for mining, however- energy costs and hardware costs.


Energy costs

Mining eats a lot of electricity, so you want to make sure you can take a tax deduction for the cost of your hydro. If you are leasing a separate space for mining, this is pretty straightforward since you’ll be getting electricity bills that you can add up and write-off for the year. But if you are using a part of your home or another multi-purpose location, you’ll need a way to segregate the hydro costs of your mining from any other (e.g., personal) use.


One route is setting up a separate meter for the part of the house used for mining (e.g., basement versus the rest of your home). This can be fairly expensive.


Another alternative is to look up the wattage of your mining rig, get the electricity cost (usually quoted per kWh) for your hydro bill, and do some math to get a pretty accurate estimate.


Hardware costs

Mining rigs can be pretty pricey, and depending on how many you are running and how often you upgrade, this can be one of your most significant business costs. You can deduct these costs on your tax return, although the way the deduction is made differs from the other expenses we discussed so far. Such equipment costs are treated as “capital expenditures” (something that is expected to last and serve you over several years).


Capital costs get deducted over time using depreciation. In some cases, you can depreciate the entire cost in a single year, but in other cases, you have to spread the expense over several tax returns.


The Bottom Line


If your crypto activity is considered a business for tax purposes, you can write-off more expenses- such as subscriptions, professional fees, and a reasonable portion of the home, phone, and internet costs.


If you’re a passive investor (not a business), you need to track the gas fees to the related crypto transactions to determine if and when you can deduct them.


Interest on loans used to invest in crypto (or for crypto businesses) is deductible.


Mining is usually treated as a business so that it can take business deductions for many costs, including hydro and equipment.


Any expenses you claim on your return need to be documented and supported.


Each case is unique and requires tailored tax treatment, as with all tax matters.


_____________________________________________________________________________


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

www.cryptoaccountantcanada.com

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.

35 views0 comments