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With the growing popularity of cryptocurrency, it's more important than ever to understand your tax obligations and to ensure that you're accurately reporting any income or gains from your crypto transactions. In this guide, we'll provide you with some basic information you need to stay on top of your Canadian crypto taxes and stay compliant with the law. We'll cover the basics of how crypto is taxed and how mining is viewed by the CRA. Whether you're a seasoned crypto pro or new to the world of digital currencies, this guide has something for you. So let's get started and take control of your crypto taxes today!
Everything will be sourced from the CRA's guidelines which you can find here.
The Canada Revenue Agency
The Canadian government has generally taken a friendly approach toward cryptocurrency. In 2014, the Government of Canada conducted a review of the taxation of cryptocurrency and recommended actions to help Canadians understand how to comply with their tax obligations. The Canada Revenue Agency has responded by issuing guidelines on the taxation of cryptocurrency and providing resources to assist Canadians in accurately reporting their crypto-related income and gains. Additionally, the government has recognized the potential for cryptocurrency to drive innovation and has supported the development of a strong and vibrant crypto industry in the country.
Overall, the Canadian government's approach towards cryptocurrency has been one of balance, recognizing the importance of supporting the growth of the crypto industry while also ensuring that appropriate measures are in place to protect consumers and support the integrity of the financial system.
The Canada Revenue Agency (CRA) views cryptocurrency as a commodity for the purpose of the Income Tax Act. The income earned from cryptocurrency transactions is generally considered either business income or capital gains, depending on your situation. Similarly, if the earnings qualify as business income or a capital gain, then any losses are treated as business losses or capital losses.
It is important for taxpayers to determine whether a cryptocurrency activity results in income or capital, as this affects the way the revenue is taxed. Not all taxpayers who buy and sell cryptocurrency are engaging in business activity. This can be a bit confusing because at the end of the day, investing is like any business that is either profitable or unprofitable.
When cryptocurrency is used to pay for goods or services, the CRA treats it as a barter transaction for income tax purposes. This occurs when two parties exchange goods or services without using legal currency. It's important to note that cryptos aren't legal currencies, as only governments have the ability to issue currency. Rather I'd recommend you view cryptocurrencies as crypto assets. The keyword here, is they are an asset class with a monetary value attached to them.
To determine the value of a cryptocurrency transaction where a direct value cannot be determined, a reasonable method must be used. It is important to keep records to show how the value was determined. The CRA generally considers the fair market value to be the highest price that a willing buyer and seller, who are both knowledgeable, informed, and acting independently of each other, would agree upon in an open and unrestricted market. For example, an exchange rate from the same exchange broker being used or an average of midday values from multiple high-volume exchange brokers could be chosen as the method of valuation. It is important to consistently use the same method.
If more than one type of cryptocurrency is held in a digital wallet, each type is considered to be a separate digital asset and must be valued separately. For example, a Bitcoin is valued separately from a Litecoin.
The way I simplify calculating my crypto taxes is through Kionly This software automatically calculates your capital gains and losses and spits out a report that you can take to your tax professional when it comes to tax time. All you need to do is to connect your crypto exchange through the Kionly API, and the software will do the rest.
Business Income Or Capital Gains
If you've recently disposed of cryptocurrency, it's important to accurately report any business income or capital gains on your taxes. Disposing of cryptocurrency means getting rid of it through means such as selling, giving, or transferring it. It's important to note that simply holding cryptocurrency is not taxable, but disposing of it can have tax consequences.
To determine whether the income from disposing of cryptocurrency is considered business income or a capital gain, you must first establish the nature of the income. Factors that may indicate you are carrying on a business include engaging in activity for commercial purposes in a commercially viable manner, conducting activities in a businesslike manner, promoting a product or service, and showing an intention to make a profit. It's also worth noting that a single transaction can sometimes be considered a business, such as if it is an adventure or concern in the nature of trade. Again, we all intend to make a profit whether we're holding crypto for the short or long term. Ultimately, it's the CRA that will classify your winnings as business income or capital gains. In general, the longer you hold an asset without selling, will be considered a capital gain. If you're a trader and you're entering and exiting positions over a short period of time, like a few days your activity will be considered as business income.
Crypto Trading
Remember if you're disposing of cryptocurrency as part of a business like trading, the profits made from the sale are considered business income. I reinforce this point because I see some investors who buy an asset like Ethereum, and when the price goes up, they sell their Ethereum or whatever crypto, and when the price goes down, they buy back in, thus capitalizing on small price moments within the month. There's nothing wrong with doing that, just keep in mind by doing so, you've just created a taxable event that the CRA will look at as business income. Therefore when you report your taxes, you'll be paying taxes on 100% of your profits.
Crypto Investing
However, if the sale of cryptocurrency does not constitute carrying on a business and the amount it sells for is more than the original purchase price or adjusted cost base, then it is considered a capital gain. Capital gains from the sale of cryptocurrency are generally included in income for the year, but only half of the capital gain is subject to tax. Any capital losses resulting from the sale can only be offset against capital gains and cannot be used to reduce income from other sources.
It's important to keep thorough records of all cryptocurrency transactions, as the CRA may request them as part of an audit. You should also report cryptocurrency transactions on your tax return, even if you do not have a taxable gain or if the transaction was part of personal use.
Crypto Mining
If you use your computer or specialized computers such as application-specific integrated circuits (ASIC) designed to process crypto transactions on the blockchain, the CRA will determine if you're engaging in a hobby or conducting business. That all comes down to how your report your earnings on your income tax for the previous year.
Conclusion
It is increasingly clear that cryptocurrency is here to stay and will continue to play a significant role in the global financial system. The technology behind cryptocurrency, blockchain, has the potential to revolutionize a wide range of industries and fundamentally change the way we live and work. From secure and transparent supply chain management to the creation of new forms of digital currency, the potential applications of blockchain technology are vast and varied. As the adoption of cryptocurrency and blockchain technology continues to grow, it is likely that we will see an increasing number of innovative and transformative uses of these technologies in the years ahead.
Make sure you're staying on top of the rules and guidelines when it comes to filing your taxes. The last thing you'd want is to be in trouble with the CRA.
Use automated reporting tools like Kionly to keep track of your crypto transactions. Their system will automatically generate the right forms you need when doing your taxes, and fill out the right tax fields.
For more information on Canadian crypto taxes including specific instructions for tax returns, refer to the Canada Revenue Agency's guidelines.
