You’ve heard about cryptocurrency for years, but have you taken the plunge into the world of investing?
There are thousands of cryptocurrencies in existence, so it can be overwhelming to know where to begin One of the biggest challenges investors face when it comes to cryptocurrencies is not getting caught up in the hype. Digital currencies have quickly risen to prominence in the portfolios of many retail and institutional investors. At the same time, analysts have continued to caution investors about the volatile nature and unpredictability of cryptocurrencies.
What is Cryptocurrency Trading?
Crypto trading is the act of buying and selling cryptocurrencies with the end goal of making a profit from the difference in the purchase and sale of the assets.
It's like the high-tech version of the stock market, but with digital currencies. Think of it as the playground of the future for those looking to make their mark in the financial world.
CRYPTOCURRENCY TIPS FOR BEGINNERS
Recent data reveals a staggering surge in crypto trading, But here lies the conundrum - how does a beginner navigate these choppy waters? If you’ve decided to invest in the cryptocurrency market, it’s important, as with any other investment, to do your research. This guide will demystify the complexities of crypto trading for beginners. Below, we’ll explore what you should know before you invest.
Starting your journey in crypto trading can be like stepping into a new world. It's exciting but can be a bit overwhelming, right? Let's break it down into easy-to-digest bites, starting with the basics.
1. Consider Why You Are Investing in Cryptocurrency
Before investing in cryptocurrency, gain a personal understanding of what you hope to achieve as this will help set the course for your actions.
The most fundamental question you should ask yourself before making a cryptocurrency investment is why you’re doing it. There are myriad investment vehicles available, many of which offer greater stability and less risk than digital currencies.
Are you interested simply because of cryptocurrency’s trendiness? Or is there a more compelling reason for an investment in one or more specific digital tokens? Of course, different investors have various personal investment goals, and exploring the cryptocurrency space may make more sense for some individuals than for others.
Begin by taking a comprehensive approach to evaluate your personal risk appetite, investment goals, and portfolio diversification. You may be interested in cryptocurrency as an alternative asset to what you already hold. You may also be interested in potentially higher returns with the understanding that this reward comes with potentially higher risks.
2. DYOR - Do Your Own Research
The number 1 rule of all crypto trading is to do your research. Each cryptocurrency has its features and use cases (some don’t even technically have a real use case!), so you should always consider why you believe the price of that crypto will rise in the future. Have a read of their whitepaper and understand the project and the Founder's goals, or have a read of what other investors have to say about the token before you invest!
3. Have a Strategy for Crypto Trading
It isn’t easy to separate genuine cryptocurrency recommendations from scams; there are lots of sharks out there waiting to take investor’s money. when investors are confronted with a lot of information about a cryptocurrency, they should take a step back from the hype.
Try to look critically at the project or platform. How many users does it have? What problem does it solve? Avoid coins that promise the Earth but haven’t delivered anything tangible.
4. Perform Test Transactions
Cryptocurrency is unlike banks in many aspects. One of the most vital reasons to understand this is should you accidentally send money to the wrong place, it may be impossible (literally) to recover. In some cases, you may lose your money forever.
As you join the cryptocurrency world, understand the importance of test transactions. Test transactions are an essential step when sending cryptocurrency because they allow you to confirm that the transaction will be successful before sending a significant amount of funds. Though they result in higher fees, they very well may be worth preventing a large error.
Test transactions involve sending a small amount of cryptocurrency to a test address. It is meant to simulate a real transaction without actually sending funds to another party. This allows you to test the sending and receiving process, confirm that your wallet is working correctly, and ensure that you have the correct address for the recipient. Once the test transaction has successfully been performed, you can copy the same transaction information for larger exchanges.
5. Do Your Homework Before You Invest
After diligent research, you have likely developed a feel for the cryptocurrency industry and may have determined one or more projects in which to invest. The next step is to time your investment. The digital currency world moves quickly and is known for being highly volatile.
Remember that digital currencies are highly speculative. For every overnight Bitcoin millionaire, many other investors have poured money into the virtual token realm only to see that money disappear. Investing in this space means taking a risk. By doing your homework before you invest, you help give yourself the best chance of success.
6. Only Invest What You Can Afford to Lose
Ultimately, all crypto trading is a risk since there are no guarantees in life. And although the volatile nature of crypto means that you could win big, it can also lose people a lot of money. So don’t invest all your life savings, particularly if you’re new.
7.Consider Volatility
There are few assets as volatile as cryptocurrency. In the same way that their value can rise within seconds, the same can be said about how quickly their value can decline. Experienced investors might be able to use volatility to their advantage, but if you’re not aware of the market’s fundamentals, you can quickly get in over your head. Make sure you understand how volatility can cause inexperienced investors to “buy high and sell low” while it can also encourage knowledgeable traders to “buy low and sell high.”
8. Manage risk
Managing risk and understanding how to avoid crypto tax mistakes is a huge part of being successful with your cryptocurrency assets. New traders need to do a bit of research on how to manage risk and develop processes that reduce risk along the way. This can help mitigate losses. Risk management, however, depends on whether you’re a short-term trader or a long-term investor. As a starting point, our crypto tax accountant recommends putting aside a fixed amount of money to trade and only using a portion of it. This helps provide a safety net if needed.
9. Diversify Crypto Portfolios
It may not pay to have too much invested in one single cryptocurrency. Or as they say: don’t put all your eggs in one basket.
As with stocks and shares, spread money out among different digital currencies.
This means less risk of being over-exposed should one of them plummet in value – especially as the market prices of these investments are highly volatile.
There are thousands to choose from, so investors should do research.
10. Understand the Order Book
By understanding an order book, you’ll understand how crypto trades are structured. In any trade, there is a winner and a loser, and you’ll want to buy low and sell high.
When there are more buy orders for an asset than sell orders, the price generally increases since there’s more demand for the crypto. In contrast, when more people sell than buy, the price decreases. On many exchange interfaces such as Wirex’s, you can see whether there are more sales or purchases overall in the market by a red or green color on the graph. This can help you gauge whether it might be the right time to buy or sell.
11. Undertake Technical and Fundamental Analysis
Technical and fundamental analysis are the two main trading analysis methods used to help understand crypto behavior. Fundamental analysis looks at the current economic and financial factors that might influence the price of the token, such as news events like the government announcing a hike in inflation rates. Alternatively, technical analysis looks at the entire price history of the token.
12. Learn Different Trading Strategies
There are many different trading methods out there beyond just buying and selling crypto when you see fit. This includes day trading, margin trading, and swing trading, to name a few, and it’s important to understand what works for you and the benefits of each before you use it as your strategy.
Bonus Tip: Work With a Professional Accountant
If you’re feeling hesitant but you still are interested in cryptocurrency, why not turn to an expert? There are plenty of professional accountants such as our team at Filing Taxes who can assist you with various aspects of your cryptocurrency investments.
We have deep industry knowledge of both cryptocurrency accounting and taxation. and take advantage of our free consultations 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.
Cryptocurrencies are all the rage these days and they’re quickly becoming a popular investment in Canada. It is extremely important to keep track of all cryptocurrency trades to remain onside with the Canada Revenue Agency (CRA).
The CRA views cryptocurrency as a commodity for tax purposes, therefore, cryptocurrency trading may result in tax implications to be reported on the tax return. The CRA assigns the responsibility of tracking and reporting this income solely to the taxpayer.
Handling cryptocurrency taxes in Canada can feel like a fast-paced game on the ice, just like a hockey player navigating a puck through defenders. Our Canada Crypto Tax Guide covers everything you need to know including crypto capital gains, crypto income, how to calculate your crypto taxes, and how to report your crypto to the CRA, ahead of the April 30 tax deadline - let's go!
Is Crypto Taxable in Canada?
Yes. The Canada Revenue Agency (CRA) is clear that crypto is subject to tax. The Canada Revenue Agency (CRA) treats cryptocurrency as property, gains from which are taxed either as business income or capital gains under income tax rates.
Transacting in crypto can face either capital gains tax, typically applicable to occasional investors, or business income tax, for those conducting crypto business activities. Each of these categories has distinct tax rates and reporting stipulations, making differentiation vital.
Common Transactions that Result in Tax Consequences:
The above is not an exhaustive list, however, if you have completed any type of transaction above, it is highly likely you have triggered a taxable event that must be reported on your tax return.
This is further supported when we consider how volatile cryptocurrency can be and how fast values change after purchase. Depending on your situation the taxable event will be treated as a capital gain/loss or business income/loss.
Tax consequences will occur for transactions where your cost base of the cryptocurrency is greater than or less than the disposition value.
How is Cryptocurrency Taxed in Canada?
Cryptocurrency isn't seen as a fiat currency in Canada. Instead, it's viewed as a commodity, which is a capital property - like a stock or a rental property. This means it's either subject to Income Tax or Capital Gains Tax.
How to Know Whether Your Crypto Will be Taxed as Income or a Capital Gain?
It all comes down to whether your investment is seen as business income or a capital gain. Let's break it down.
The CRA states that they decide on whether you have business income or capital gains on a case-by-case basis. They also state that an individual transaction may be considered business income, while other transactions by the same investor may be considered a capital gain. All this to say, it's not too clear what precisely the CRA considers business income.
They do have some guidance on this. The CRA states the following are common signs that you may have business income or capital gain.
The more active you are in crypto trading and the more profit you make increases the likelihood of your crypto profits being considered business income as opposed to capital gains. You should speak to an experienced crypto tax accountant in Toronto for bespoke advice on your investments and their subsequent taxation, but we can look at the general rules on how business income and capital gains from crypto are taxed in Canada.
Business Income Tax
Crypto transactions that are conducted as part of a business or professional activity are subject to business income tax. In such cases, the entire profit generated is considered taxable income. Business income tax rates may differ from the capital gains tax rates.
What Falls Under Business Activities?
To determine whether crypto transactions constitute a business activity, the CRA considers factors such as:
Sometimes, an individual transaction may be considered business income, while other transactions by the same investor may be considered a capital gain. There are many crypto transactions that could be considered income by the CRA - including disposing of your crypto if you're trading regularly and at scale. One of the simplest ways to think about it is anytime you're seen to be 'earning' crypto - this could be seen as business income and subject to Income Tax instead.
Examples of crypto transactions that could be considered business income include:
Remember if you're selling and swapping crypto at scale - like a day trader - then your profits could be considered business income, not capital gains. The CRA is pretty behind the curve when it comes to the tax treatment of crypto in Canada, but we can safely assume that based on their business income guidance, most DeFi transactions would be considered business income as you're conducting transactions for a commercial reason. Examples of DeFi transactions that would be viewed as income and subject to Income Tax include:
There are also many play-to-earn platforms and other similar engage-to-earn platforms that have sprung up in the crypto space in recent years. The rewards you receive from these could also be considered business income and subject to Income Tax. Examples include:
As we said above, the CRA hasn't released specific guidance on most crypto transactions beyond basic dispositions just yet. However, as their guidance for what is considered business income includes conducting activities for commercial reasons - it is quite likely all DeFi transactions would be considered business income and subject to Income Tax. Of course, it is advisable to speak to an experienced tax accountant in Toronto for your crypto investments.
Tax Implications for Professional Traders
Professional or day traders in crypto are subject to business income tax. In this scenario, 100% of the profits from cryptocurrency trading are taxed as business income based on their fair market value at the time of receipt.
Reporting and Compliance
Business crypto transactions that are subject to income tax should be reported with Form T2125.
Crypto Capital Gains Tax in Canada
You'll have a crypto capital gain or loss any time you sell, swap, spend, or gift your crypto - so you need to know how to calculate crypto gains.
A capital gain or loss is the difference in value from when you bought or otherwise acquired your crypto to when you disposed of it by selling it, swapping it, spending it, or gifting it. If you've made a profit from the difference in value - you'll have a capital gain. If you've made a loss from the difference in value - you'll have a capital loss.
Because cryptocurrency is viewed as a capital asset, when you dispose of it by selling it, swapping it, spending it, or gifting it - you'll owe Capital Gains Tax on any profit you make. Crypto transactions which are considered a disposition in Canada include:
To calculate capital gains, the following key components must be considered:
Taxable Portion of Capital Gains
If your crypto is taxed as a capital gain, you'll only pay Capital Gains Tax on half of any profits of a crypto transaction. In Canada, only 50% of the capital gains are taxable. This means that if an individual realizes a capital gain of $10,000 from a crypto transaction, they will include only $5,000 (50% of the gain) in their taxable income for the year.
Marginal Tax Rate
The taxable portion of capital gains is added to an individual's total income for the tax year. The applicable marginal tax rate is then applied to this combined income to determine the actual tax owed. Canada employs a progressive tax system, meaning that the rate at which capital gains are taxed depends on an individual's total income.
Reporting and Compliance
Individuals must report their capital gains from crypto transactions on their annual income tax return. Schedule 3 - Capital Gains is used to calculate and report these gains. Accurate record-keeping is vital, as the CRA may request supporting documentation in case of an audit. Details such as transaction dates, amounts, and counterparties should be meticulously recorded.
Cryptocurrency Tax Breaks in Canada
You can use the following tax breaks to further minimize your crypto tax liability.
Crypto capital losses
You won't pay any Capital Gains Tax on any capital losses from crypto. But don't just write these off as a bad time - utilize them to reduce your tax bill.
You can offset your capital losses against your capital gains for the tax year to reduce your overall tax bill.
The 50% rule for capital gains equally applies to your capital losses. This means you can only offset half your net capital loss in a given tax year. If you've done this and you still have more losses, you may carry this figure forward to future financial years to offset future gains. Similarly, if you have no capital gains in a year, you can carry forward half your capital losses to offset against future gains.
If you wish to carry your current year’s net capital losses into a prior tax year, you can use Form T1A - Request for Loss Carryback.
If you wish to carry over a previous year’s net capital loss into the current year, you can claim it on line 25300 of your tax return.
Tax on Lost or Stolen Crypto
The CRA has not released specific guidance stating whether you can claim lost or stolen crypto as a capital loss.
However, they do allow taxpayers to deduct capital losses due to the theft of other capital property. As crypto is considered to be capital property under Canadian law - you may be able to claim a capital loss for stolen crypto.
Is Any Crypto Tax-Free in Canada?
Some specific crypto transactions are tax-free in Canada. Crypto transactions that trigger no taxable event in Canada:
When is the Deadline for Reporting Crypto Taxes in Canada?
In Canada, the tax year runs from January 1 to December 31. You should report all of the taxable transactions during the year on your tax return.
Typically, the deadline for reporting your taxes to the CRA is April 30 after the end of the tax year. You don't have to leave it until the last minute, taxpayers can begin submitting tax returns from the end of February.
Similarly, your payment will be considered made on time if it is received by the CRA, or processed at a Canadian financial institution, on or before April 30, 2024.
If you're self-employed you have until the 15th of June 2024, but it's important to note that the payment deadline is still the 30 April.
How to file crypto taxes with CRA paper forms
Filing by post? Experienced tax accountants in Toronto can still help you file your crypto taxes. Just follow these steps.
Crypto Compliance and Record-Keeping records will the CRA want?
Compliance with crypto tax regulations is critical to avoid potential penalties and audits by the CRA. To ensure compliance, individuals should:
What Happens if You Don’t Report Crypto Tax?
The CRA doesn’t take to tax evasion or fraud kindly. Not reporting or under-reporting your crypto gains and income you can face heavy fines and imprisonment.
Canada Crypto Tax Filing Forms for 2024
Here’s a look at common crypto tax filing forms in Canada for 2024.
What to do if Haven’t Reported Crypto Taxes in Previous Years?
If you haven’t reported your cryptocurrency gains and income in previous tax years, you can apply for a correction through the Voluntary Disclosures program.
If your application is approved, you will be required to pay taxes plus interest. However, you will receive prosecution relief, and potentially penalty relief and partial interest relief.
How We Can Help with Your Crypto Taxes in Canada
If you need assistance to calculate your Canada crypto tax, look no further than Filing Taxes. We are a full-service crypto tax accounting firm in Toronto.
We take the challenges out of your crypto tax Canada filing and guarantee both accuracy and thoroughness. And if you have questions or doubts about your crypto tax in Canada, our experts will be glad to assist.
With our team of expert accountants in Toronto reporting your Canada crypto taxes has never been easier.
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.
This will close in 0 seconds
