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:
- Exchanging cryptocurrency for fiat currency (e.g. CAD, USD).
- Exchanging cryptocurrency for another type of cryptocurrency.
- Exchanging cryptocurrency for stablecoins.
- Using cryptocurrency to purchase goods or services.
- Exchanging cryptocurrency for an initial coin offering.
- Gifting or donating cryptocurrency.
- Yield farming and other DeFi activities.
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.
- Income tax: Earning cryptocurrency is subject to income tax. Examples include earning staking income, receiving crypto as compensation for your work, and earning income from an NFT that you created. You will pay your usual federal or provincial tax rate. If you’re categorized as a trader by the CRA, all your profits from cryptocurrency will be considered income.
- Capital gains tax: Typically, cryptocurrency dispositions are subject to capital gains tax. This includes selling or gifting your cryptocurrency, trading it for another cryptocurrency, or using your crypto to make a purchase. For capital gains, you will pay tax on half of any crypto gain.
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:
- Conduct crypto activity for commercial reasons.
- Promote a product or service.
- Show the intent to make a profit.
- Frequency and volume of transactions
- Degree of organization and systematization
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:
- Mining crypto.
- Getting paid in crypto.
- Staking rewards.
- Referral bonuses.
- Selling an NFT you've created.
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:
- Earning interest through yield farming on lending protocol like AAVE, Maker, or Compound.
- Earning new liquidity pool tokens, governance tokens, or reward tokens on protocols like Uniswap.
- Lending your crypto to platforms like NEXO to earn interest.
- Earn crypto dividends on platforms like CoinRabbit.
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:
- Referral rewards like Binance Referral.
- Learn to earn campaigns, like Coinbase Learning Center or CoinMarketCap Learning Center.
- Watch to earn platforms like Odysee.
- Browse to earn platforms like Permission.io browser extension or Brave.
- Play to earn games like Axie Infinity.
- Shop to earn through browser extensions like Lolli.
- Share public addresses to earn on platforms like Moon Faucet.
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:
- Selling crypto for CAD.
- Swapping crypto for another crypto.
- Spending crypto on goods or services.
- Gifting crypto.
To calculate capital gains, the following key components must be considered:
- Proceeds of Disposition: This represents the amount received from the crypto transaction, such as the sale of crypto for fiat currency or the fair market value of crypto used for purchasing goods or services.
- Adjusted Cost Base (ACB): The ACB is the total cost associated with acquiring the crypto, including the purchase price, transaction fees, and any other expenses directly related to the acquisition.
- Capital Gain (or Loss): The capital gain is determined by subtracting the ACB from the proceeds of disposition. If the result is a positive value, it represents a capital gain; if negative, it signifies a capital loss.
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.
- Capital gain inclusion rate: As mentioned earlier, only 50% of your capital gains are considered taxable income in Canada.
- Personal tax allowance: In Canada, the first $15,000 of income is considered tax-free.
- Spousal tax credit: In cases where the personal tax allowance isn’t fully used, it can be transferred to your spouse. For example, if your partner has no income for the year, they can transfer their full $15,000 credit to you.
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:
- Simply purchasing and holding crypto with fiat.
- Moving crypto between your own wallets.
- Being gifted crypto.
- Creating a DAO (Decentralized autonomous organization).
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.
- Calculate your crypto tax. You need to know your capital gains, losses, income, and expenses.
- Complete Schedule 3 with your capital gains and losses from crypto
- Fill out your Income Tax Return and include any crypto income.
- Post your Income Tax Return to the CRA. You should post-tax returns at least 12 weeks before the deadline to ensure you're not late on filing your taxes.
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:
- Keep detailed records of all crypto transactions, including dates, amounts, counterparties, digital wallet records, transaction types, exchange or trading platforms, and transaction fees for at least six years.
- Maintain records of their ACB for each cryptocurrency.
- Report capital gains and losses accurately on their income tax return, using Schedule 3 - Capital Gains when applicable.
- Report foreign income and assets, including foreign crypto holdings, as required by the CRA.
- Seek professional tax advice and guidance if their crypto transactions are complex or if they have concerns about their tax obligations.
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.
- In most cases, Canadian taxpayers file their capital gains from crypto with a Schedule 3 - Capital Gains form.
- Business crypto transactions are subject to income tax and should be reported with Form T2125.
- If you're a Canadian resident taxpayer who holds crypto outside of the country, you must file Form T1135 with CRA if the total cost of your specified foreign property (including cryptocurrency) is more than $100,000.
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.