With the Canada Revenue Agency (CRA) announcing that Canadian taxpayers would be liable for taxes on crypto, many are feeling uncertain and inquisitive about the question – how is crypto taxed in Canada? It is common knowledge that crypto is not considered legal tender currency yet; instead, these digital assets are counted among commodities owned by individuals and organizations.
Depending on what activity you use cryptocurrencies for, they can be taxed based on either capital gains or income tax. In case your activity with cryptocurrency is considered to be a business, you need to keep in mind that 100% of business income is taxable. On the other hand, only 50% of capital gains are taxable, thus leading to the need for establishing whether you are operating on a personal or business level.
What Crypto Transactions are Taxable in Canada?
Cryptocurrency taxation was revised by the Senate in 2014, and the CRA brought out a detailed guide to help Canadian taxpayers understand details on the same. The CRA states that a disposition of cryptocurrency results in taxable consequences, which include:
- Selling crypto for fiat currency
- Trading crypto for crypto
- Using crypto to buy goods and services
- Making a sale or gift of crypto
How to Determine Value of a Cryptocurrency Transaction?
The CRA requires taxpayers to use a “reasonable method” for figuring out the value of cryptocurrency in a transaction if it is not already obvious. At the same time, proper records need to be maintained at all times about how you have figured this value to be able to prove the logic to authorities as and when necessary. Consistency is important and so is logic. Make sure you consult an expert to review the specifics of your case from time to time.
Reporting Business Income or Capital Gains from the Disposition of Crypto
To understand whether or not you are disposing of cryptocurrencies for business income or capital gains, you need to answer the following questions:
- Are you using cryptos for commercial reasons or in a commercially viable way?
- Are you undertaking such activities using cryptocurrency which is befitting for a business-like manner such as preparing business plans and acquiring capital assets and inventories?
- Are you using cryptos to promote a product or service?
- Are you showing that you intend to make a profit, even if you might not actually end up doing so in the short term?
Depending on the situation, both a single situation and a repetitive process could be considered as business activity. Day trade crypto dealings, crypto mining, and exchanges, including ATMs may all be counted under cryptocurrency businesses. Another key point to remember is that cryptocurrencies are not Canadian securities under the Income Tax Act.
If the sale of crypto does not fall under the category of carrying out a business, and the amount sells for more than its original purchase price or adjusted cost base, the taxpayer could be said to have realized a capital gain.
These gains are included in the income for the year, with half of the gains being subject to tax, called the taxable capital gain. Capital losses resulting from the sale must be offset only against capital gains and not to reduce income from other sources and might even be carried forward if you do not have any capital gains against which to offset them for the present or previous three years.
Taxation for Special Type of Crypto Dealings
Day Trading Cryptocurrency
Day trade crypto dealings are considered commercial or business income by the Canadian Revenue Agency. It involves the buying and selling of cryptos for short periods to make a profit. The profits from day trading cryptos minus the net losses must be reported on the income tax return annually.
Mining Cryptocurrency
Crypto mining refers to the process of using a computer to complete mathematical problems and then confirm crypto transactions. Depending on whether this is done for a hobby or as a business, the income may be classified accordingly – capital gains for hobbyists and vice versa.
Trading Cryptocurrency for Another Type of Crypto
The transaction resulting from the exchange of one cryptocurrency with another is also considered a disposition leading to either gain or loss and might fall under business income or capital gain. The same rules as above apply to such an occurrence.
Cashing out Cryptocurrency
At one point or the other, you might decide upon cashing out your profits in cryptos such as Ethereum either via an exchange or OTC desk, with the second being the more reliable, safer, faster, and even cheaper option of the two. However, to be able to cash out Ethereum in Canada, you are required to pay taxes either as business income or capital gains tax.
Holding, Buying, Transferring Cryptocurrency
No taxes are charged for holding and buying cryptos or simply transferring them from one wallet to another.
The Bottom Line
Earnings from cryptocurrencies are taxed in Canada, though it is a continuously evolving, dynamic affair. It is best to consult a taxation expert who specializes in cryptocurrency to be sure that you are following the proper protocol at all times.
Whether you are looking to figure out what category your income falls into or perform some activities with your holdings and cannot determine the taxation on it, we will get you on board in no time and help you figure out everything with ease!
