Cryptocurrency Taxes in CanadaJuly 26, 2023
Just like stocks and day trading, cryptocurrency is one of those things that is becoming more and more popular. While cryptocurrency isn’t a main form of currency yet, it can still be worth a lot and is often used as a form of investment. What form of cryptocurrency you own will dictate its worth since each has its own value. Similar to our currency where each is worth different amounts like the $5 bill or even the $20 bill. Similar to the income we earn, we also have to pay taxes on cryptocurrency. Interestingly enough, though, cryptocurrency is considered a capital asset. This means, while you still have to pay taxes, unless you have a crypto business, you only pay capital gains tax on your crypto earnings.
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Canadian Tax Regulations
Just like other investments, you are taxed in Canada on cryptocurrency. How it works, according to the CRA, is that you are taxed on 50% of everything you earn from crypto as well as other sources of income from crypto such as staking and being paid in crypto. This includes Bitcoin or any other form of crypto.
How much you pay in income tax on crypto depends on if it is considered regular income or capital gains. For anything that is considered a capital gain, you will pay the federal and provincial tax rates on 50% of your gains. For regular income you just pay the standard federal and provincial rates that apply.
That being said though, there are some instances where you aren’t required to pay any taxes on crypto. Those are:
- Holding crypto assets
- Receiving crypto as a gift
- Moving your crypto between your wallets
- When you create a Decentralized Autonomous Organization (DAO)
- Purchasing crypto with fiat currency (currency backed by the government that isn’t backed by commodities like gold for example)
Cryptocurrency Tax Regulations
In Canada, there are no set regulations just for cryptocurrency. They are treated as investments so the rules and regulations for securities are followed. As mentioned above, depending on how you earn money from crypto, it can be considered business income or capital gains. There are a few guidelines that CRA does have though that can help you with your crypto taxes.
When you pay for things using cryptocurrency, the CRA considers this to be a barter transaction. This is because crypto isn’t considered a currency just yet by the government and the definition of a barter transaction is an exchange of goods or services not using a legal currency.
When you are doing a transaction and need to provide a value for tax purposes, the CRA asks that you calculate the value if there is no direct value associated with the transaction. There are a few different methods you can use to figure this out. In general though, the government considers the fair market value to be the highest value that a buyer or seller would consider for the particular commodity. It is also necessary to provide proof of how you found that value. They also prefer you to use the same method for all of your crypto values. Remember to declare each type of crypto separately since they all will have different values.
Difference Between Capital Gains and Business Income
It can be a bit complex to figure out if you are considered to have business income or capital gains. Generally these do need to be looked at for each individual situation, but usual random transactions that aren’t contributing to your annual income would be capital gains. It is good to verify with a professional though.
Some indications that you are running a business are:
- If you promote a product or a service
- Do things like create a business plan
- Acquire inventory and/or capital assets
- Show intention to make a profit
- Show activity is done for any commercial purpose
There will likely be some consistency with your trading if you start or plan to start a business. In certain circumstances, one transaction could be considered a business but that wouldn’t always be the norm.
Some examples of crypto businesses are:
- Cryptocurrency Mining
- Cryptocurrency Trading
- Cryptocurrency Exchanges
Mining cryptocurrency is similar to how it sounds. Basically miners use special computers to solve difficult math problems that confirm different crypto transactions. These are then converted into what miners call blocks. From there they need to figure out how many blocks are needed to create valid blocks. These groups of blocks are added into public ledgers called blockchains. Once one of these has been created, the miner is then paid in crypto. Their payment is for creating the block as well as transaction fees.
If you are a cryptocurrency miner, your taxes are based on if you mine as a hobby or if it is a business. This is mostly dictated by how much you mine as well as how much income that you earn. If you are just seen as an individual then you only pay capital gains taxes, if your mining operation is considered to be a business then you will have to pay business income taxes.
Some information you should keep to file at tax time as a miner:
- Mining hardware receipts
- Expense receipts
- Mining pool details and records
- Related mining expenses
This is trading one type of crypto for another. For tax purposes, this is an example of a barter transaction. This is when you would find the fair market value of each currency then declare it in canadian dollars on your income tax return. The name for this is a disposition. Trades are taxed as capital gains or losses based on the fair market value in Canadian dollars.
This consists of using online exchange platforms for cryptocurrency. Some examples of this would be Binance and Coinbase. Just because you are using a platform to help you with your crypto buying, selling and trading, it doesn’t mean you aren’t subjected to taxes. These platforms can help you with making informed decisions as well as keeping track of all of your crypto transactions, though. Which platform you use will make a difference in how you find this information and submit it to the CRA with any other required information.
Taxes When Using Crypto Platforms
When you are using different cryptocurrency platforms and different currencies it is important to file all of those different transactions separately. Each platform you use will be different though when it comes to gathering the information you need at tax time since you do need to keep track of all the crypto transactions you have made for each tax year. It is required to keep this information for 6 years from the end of the last relevant tax year.
The things that should be included in your records are:
- Transaction dates
- Receipts for purchases and transfers
- Fair market value at the time the transaction occurred
- Wallet records
- Cryptocurrency addresses
- Exchange records
- Accounting costs
- Legal costs
- Software costs for managing taxes
- Transaction descriptions
The amount that you pay on your taxes depends on if the income is considered business income or not. If it is, then you pay tax on 100% of your earnings. If it’s not, then you pay a capital gains tax which means you only pay tax on 50% of your profits.
Binance and Filing Taxes
While Binance does not provide tax documents to help you file your tax returns, they do keep track of all of your transactions. You can log into your account at any point and download all of this information easily. While it will not contain everything that you need in order to file your taxes, it will provide you with all of your transaction history and anything related to that.
In order to access this information you use the Binance Tax Tool. It allows you to view and edit your tax report. You can then generate your tax report as well. This makes it a lot simple to calculate your liabilities.
Another important thing to remember about binance is, while they do not report all transactions to the Canada Revenue Agency, they do report all transactions over $10,000. Any agency that deals with money has to report any transactions over $10,000, so you will notice that they all do it including crypto.com.
Coinbase and Filing Taxes
Just like Binance, Coinbase provides all your transactions in a downloadable form to help with making filing your taxes easier. While Coinbase does not directly report to the CRA. Most financial institutions and platforms, like Binance, report transactions over $10,000, Coinbase will soon be reporting transactions over $1000 in Canada.
Wealthsimple and Filing Taxes
Unlike Coinbase and Binance, Wealthsimple will report all of your crypto transactions and crypto earnings to the CRA at the end of the year. They handle all of the tax stuff for you making it much easier than with other platforms. While they do report all transactions, not just the ones over $1000 or $10,000, you would have to report all of your transactions anyways to avoid any tax penalties, audits and even tax evasion.
Cashing Out Cryptocurrency Without Paying Taxes
Unfortunately, if you cash out cryptocurrency, then you have to pay taxes on it. The factors like business income and capital gains will determine how much tax you are required to pay. What many people don’t realize is that the CRA is monitoring all crypto activity. They work with lots of the crypto platforms to verify that those who are investing and trading in crypto are filing their taxes correctly.
The CRA is also involved with FINTRAC. This stands for Financial Transactions and Reports Analysis Canada. FINTRAC monitors financial institutions and they also investigate potential cases of money laundering and tax evasion. Any transactions that are registered with FINTRAC also contain a copy of your government issued ID which helps the government connect that money to you. Really, between the crypto platforms the federal government is working with as well as FINTRAC, there is not much of a point trying to avoid paying crypto taxes. Avoiding paying your tax obligations or filing them all together can be considered tax evasion.
Another way some people like to try and avoid paying taxes is to invest into TFSA’s (Tax Free Savings Accounts) and RRSPs (Registered Retirement Savings Plans). While it can be done with some forms of investments, it can’t be done with cryptocurrency. And if it is done with other types of investments, if it isn’t done correctly you could still be subject to paying taxes and penalties. If you are looking into investing your crypto though, there are crypto-backed ETFs or other types of crypto investments. This won’t avoid taxation though because, once an asset is cashed out, you do have to claim it. You, however, could earn more money with these different types of investments.
The process of reporting crypto is different whether your income is considered a taxable capital gain or business income. If it is considered income, there is a form called the T-2125, also known as the Statement of Business and Professional Activities. Because this is business income tax, you are able to write off anything related to your business like subscriptions, internet bills and any office related expenses.
You can also claim if you had negative earnings with your crypto business. This is called a non-capital loss and can be deducted off of any other taxable income you receive. Keep in mind, if you can’t file the non-capital loss one year, it can be carried forward to the next year.
If your crypto income is a capital gain, or you have any capital losses, those can be claimed under Section 3. As we mentioned before, capital gains taxes applied meaning you only pay tax on 50% of the gain. If you have capital losses and can’t use them, they can be carried forward to the next year. And, just like with day trading taxes, the superficial loss rule applies to crypto as well.
When you value your cryptocurrency, first you have to distinguish whether it is capital property or inventory. In order to calculate the value of your capital property you need the value it was purchased at as well the fair market value. This will allow you to calculate the capital gain.
In order to value any crypto you consider to be inventory there are a few different methods. The first is to look at the value when the inventory was purchased as well as its fair market value at the end of the year and use the lowest amount. The second method is to take all of your inventory then value it at the end of the year at fair market value. There are plenty of other methods you could use as well. Just be year, whichever method you choose, you use it every year.
If you’re looking for a simpler way to file your Cryptocurrency taxes, then Koinly Canada can help. It’s a Canadian Bitcoin tax calculator and works with over 750 crypto sites. It calculates your gains and losses, pre-fills your forms and can even integrate with Turbotax. If you do your own taxes, this can be a great way to simplify it.
When it comes to filing your taxes, the CRA can already track your crypto transactions. What Koinly does is put all of those transactions together in order to help you avoid any mistakes. Missing some of your transactions can become a huge issue, using Koinly can simplify the process.
Overall Basics of Crypto Taxes
If you have any cryptocurrency or are looking into buying and selling crypto, it is important to keep detailed information on all of your transactions or use a platform that you know will help keep track of it for you. Just like any other form of income, crypto earnings are taxable. It doesn’t matter whether it is a one time transaction, or a business, you still need to declare any income you have made just like you would for any other form of employment.
Because cryptocurrency is internet based, the government does have access to this information even if you don’t report it. To avoid any issues when filing your income tax return, a tax professional will be able to help guide you in how to family your crypto taxes and what types of income your transactions would be considered. Basically, as long as you keep all of your records or have access to them, it shouldn’t be too overwhelming to file your tax returns. Even if you choose to provide that information to an accountant or tax professional to get the most out of your tax return, you want to make sure that you have as much information as possible to avoid any confusion or penalties.
Overall, filing your taxes for cryptocurrency isn’t much different than any other forms of investing or owning your own business. You just want to verify you keep track of all of your earnings and expenses in order to make sure you file correctly and pay the right amount of taxes.