As cryptocurrencies gain popularity in Canada, it’s becoming increasingly important to be well-versed in crypto tax planning. By properly understanding the tax implications of crypto transactions, accounting firms can help their clients minimize their tax liabilities while ensuring compliance with all applicable laws and regulations.
Understanding Crypto Tax Planning
Crypto tax planning involves ensuring that all crypto investments and trades are properly reported on tax returns and that any taxes owed are paid in full. While there are similarities between traditional investments and crypto investments from a tax perspective, there are also some key differences.
One of the biggest differences is that cryptocurrencies are considered property by the Canada Revenue Agency (CRA), rather than currency. This means that gains and losses from crypto transactions are treated as capital gains and losses, which can have different tax implications depending on the length of time the asset was held.
Tips To Prepare for Crypto Taxes & Reporting on The Right Crypto Taxes Form
The taxation of cryptocurrency has been the subject of much misinformation. Make no mistake, the CRA will get their piece of the crypto pie. If you have purchased or will be purchasing cryptocurrency, this document will provide you with a basis to cover your liabilities for tax.
Below are a few tips on how to make the crypto tax reporting process a bit less painful and your records a lot more accurate.
1. Get hold of your data
Keep a Crypto Transaction & Trading Journal. The first thing you need to know is that you must save all of your transaction history. Getting in the habit of writing down your trades and transactions will only benefit you in the long run. Having a physical record of each of your trades and transactions makes it easier to keep up with your records when you’re reporting during tax season. For example, when it comes to trades, you can write down the date of the trade, the platform that you used (Coinbase, Binance, etc.), the assets that you traded, the non-custodial wallet that you used, any trading or blockchain fees, the amount that you traded, and more.
Find the trade history on your exchange’s website, download the transactions from the relevant time frame, and keep copies for yourself. Your accountant will need these exports from these exchanges to calculate your tax liabilities, just like trading information from a stock brokerage.
2. Cross-check your transactions with centralized exchange records
If you do most of your crypto trading on a centralized crypto exchange like Kraken or Gemini you’ll be able to use this to your advantage. Navigate to your utilized cryptocurrency exchange and download records of each of your trades. You can then cross-check the exchanges’ records with the transaction records that your crypto tax software provides.
3. Initial Coin Offerings (ICO)
When buying tokens from an ICO, the information you’ll need for tax purposes will not be included in your trade history. You’ll need to keep your own record of the date, and the price and amount of the token used to make the purchase. Your purchase price (cost) of these new tokens will be equal to the value of the token used to participate in the ICO.
4. Using crypto as currency
If you’re using your crypto to actually buy and sell things, you will need to record these transactions as well. These are ‘barter’ transactions. The deemed price at which you ‘sold’ that cryptocurrency is the value of the item purchased.
If you were buying or selling goods in the course of business, you need to consider sales tax implications as well. If you provide GST-taxable services, are a registrant, and accept Bitcoin, you still must remit GST based on the value of those services as if it were a cash transaction. And, if you purchased those services as a business, you could still claim an input tax credit at that cash value, (and expense the services, of course.)
5. Common misconceptions
Exchanging one cryptocurrency for another, even when no fiat currency is withdrawn, is a taxable transaction. Think of cryptocurrencies as commodities. If you traded gold for silver and profited from the change in the price of gold, this is a taxable capital gain. Crypto is no different.
Each transaction is taxable, except for the purchase of cryptocurrency using after-tax fiat currency. You can buy as much crypto as you want on Coinbase, and there is no taxable transaction until you trade or sell.
6. Capital Gains Vs Business Income
Whether your cryptocurrency activity will be treated as capital gains or business income for tax purposes is an important distinction your accountant can help with.
Generally, most people’s activity with cryptocurrency will be taxed as capital gains. The CRA considers many factors, including:
7. Other sources of income:
Is your full-time job trading cryptocurrency? This would be considered business income.
Does your job have nothing to do with trading securities and commodities? This is more of a hobby, and you intend to treat crypto as capital.
8. Activity frequency:
Do you have thousands of trades per year? This indicates significant effort and will likely be treated as business income.
Business income is taxed at 100% of your personal tax rate, whereas capital gains are taxed at 50% of your personal tax rate. This creates a bias; wanting to treat losses as business losses, and gains as capital gains to reduce tax. If you are unsure, your accountant can help make an unbiased determination.
9.Incorporation
We encourage people who would be taxed as business income to incorporate. This allows for tax planning with your income and tax deferral.
The Relevance of Crypto Tax Planning
CRA has issued guidance on the taxation of cryptocurrency, including information on how to report crypto activities on tax returns. It’s essential to keep abreast of this guidance and any updates to it to ensure compliance with the law.
Failing to properly report income from crypto transactions can lead to penalties and interest charges. Clients must understand the reporting requirements and accurately disclose all taxable events related to their crypto activities. By assisting clients in complying with these regulations, firms can protect them from potential legal consequences.
How to Reduce Your Cryptocurrency Taxes
For starters, keep good records of all your cryptocurrency activity. As mentioned earlier, cryptocurrency gains can be offset by capital losses. Such losses can even be carried forward into the future to reduce your tax bill over the long run.
If you donate to a charity that accepts cryptocurrencies, you can claim your contribution on your tax return and offset any capital gains you’ve made for the year. Finally, if you derive all of your income through cryptocurrency trading, you can apply the basic personal amount of $14,398 (the amount you can earn before you start paying taxes) to your earnings to reduce your tax bill.7
Unfortunately, you can’t hold cryptocurrencies in registered tax-sheltered accounts, such as RRSPs and TFSAs. If you want to invest in cryptocurrencies within such accounts, you could opt for crypto-backed ETFs and mutual funds instead.
Also, you cannot currently pay your taxes in Bitcoin or any other cryptocurrency. You may only make tax payments in Canadian dollars.
Where to Report Cryptocurrency on Your Income Tax Return
If you’ve determined that your cryptocurrency earnings would be considered business income in the eyes of the CRA, you’ll need to complete form T2125, Statement of Business or Professional Activities. If your business income from cryptocurrencies is a negative figure, it’s considered a non-capital loss. This means it can be deducted from any other sources of income you had that year to lower your taxes.
Capital gains or losses are reported on Schedule 3 of your personal income tax return. Remember that capital losses can only be used to offset capital gains, but those gains don’t need to be from other cryptocurrency investments.
You should also note that if you or your business accepts cryptocurrency as a form of payment for any taxable products or services, you’ll need to calculate and report the owed GST/HST amounts for that sale based on the crypto values that day.
Filing Taxes Can Help!
It might seem that with the anonymous nature of cryptocurrency dealings, it would be easy to hide any money you earn from the government. However, the CRA can track your income and conduct audits and investigations to make sure you are reporting your earnings accurately.
The consequences of not reporting cryptocurrency income are the same as not reporting Canadian dollar income, which can be considered tax evasion. It would be wise to consult a professional accountant if you are unsure about how to pay taxes on your cryptocurrency income.
Last tip for preparing for crypto tax preparation includes working with a professional accountant. We are leading cryptocurrency taxation professionals in Canada. While it’s tempting to navigate your cryptocurrency taxes on your own, the process can be stressful and requires in-depth knowledge. Our team of expert accountants at Filing Taxes can guide you when filling out your crypto taxes form and ensure that everything is submitted properly. Take advantage of our free consultations and feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.
Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.