Having trouble navigating the Canadian tax code?
All across the world, governments are still figuring out how to tax the rapidly-evolving cryptocurrency space. Canada is no exception. Unfortunately, that means crypto investors often end up feeling overwhelmed and confused on how to deal with their tax returns.
In this guide, we’ll break down Canada’s cryptocurrency tax rules based on the latest guidance from the CRA and Revenu Quebec. This article will cover how cryptocurrency is taxed in Canada, how you can report your taxes, and a few simple ways to reduce your tax liability.
The Canadian Revenue Agency (CRA) treats cryptocurrency as a commodity for tax purposes.
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.
In some circumstances, you may recognize cryptocurrency income outside the form of capital gains. Examples include earning staking income, receiving crypto as compensation for your work, and earning income from an NFT that you created.
Cryptocurrency activity can produce income tax or capital gain tax depending on what the activity is and whether that activity is treated “as a business” or simply “as a hobby”.
If you are operating “as a hobby”, whether as an investor, or participant within crypto, your sales of crypto assets or other dispositions will be treated as capital gain or loss.
If you are operating “as a business”, whether as a trader, miner, or otherwise within crypto, your activity will be treated as business income, and you will be subject to income tax.
In Canada, your income – whether business or hobby – and your capital gains are taxed differently. While income is fully taxable, only 50% of capital gains are taxable.
Some factors that the CRA uses to determine whether how your cryptocurrency will be taxed include:
The CRA determines whether a transaction should be treated as business income or capital gains on a case-by-case basis. In some circumstances, even a single transaction can be treated as business income.
To calculate your capital gain or loss on cryptocurrency disposals, you can look at how the price of your assets has changed since you originally received them. You need to know the proceeds of the disposition and the adjusted cost base of the property. Consider the example below.
In this case, Hannah’s proceeds are $1,500, and her adjusted cost base is $1,000 leaving her with $500 of capital gain. After figuring for the 50% capital gain inclusion rate, her taxable capital gain is $250.
Here are a few examples of cryptocurrency transactions that are considered tax-free in Canada.
The total amount of tax you pay depends on what tax bracket you fall under. Here’s a breakdown of tax levels during the current tax year.
Remember, 50% of your crypto capital gains will be subject to tax. You may pay additional taxes depending on your province of residence.
There is no legal way to evade paying taxes on cryptocurrency in Canada. While crypto transactions are conducted anonymously, the CRA does have the right to demand customer data from crypto exchanges. It uses this data to figure out who has crypto-related income that should be reported on taxes.
The following tax breaks are available for all Canadian investors.
Unfortunately, all disposals of cryptocurrency are subject to capital gains tax. However, there are tactics that you can use to reduce your cryptocurrency tax liability.
All Canadian adults are allowed to deposit money into a tax-free savings account (TFSA). While you can’t directly hold crypto in your TFSA, you can hold ETFs that track the price of cryptocurrencies like Bitcoin and Ethereum.
If you’re running a crypto business, any cryptocurrency losses can be deducted from your business income and reduce your income tax liability for the year.
Transaction fees from transferring and trading cryptocurrency can be added to your adjusted cost basis and thus help reduce your overall capital gains.
If you are running a cryptocurrency business, you’ll be able to write off associated expenses. For example, a mining business can write off the costs of electricity and equipment.
The CRA requires the Adjusted Cost Basis (ACB) costing method to calculate your gains and losses on your cryptocurrency — unlike the U.S. which allows various methods such as FIFO, LIFO, or HIFO.
Your ACB is the total average cost (in CAD) of each unit of that cryptocurrency at any given time. To better understand how this works, take a look at the example below.
Buying cryptocurrency with a fiat currency like CAD is considered non-taxable.
When you sell cryptocurrency, you incur a capital gain or loss depending on how the price of your crypto has changed since you originally received it.
Trading your cryptocurrency for other cryptocurrencies is considered a disposal. You’ll incur a capital gain or loss depending on how the value of the crypto you’re trading away has changed since you originally received it.
Simply holding cryptocurrency is not considered a taxable event.
In Canada, capital losses can be used to reduce any capital gains you had in the year and your tax liability. However, losses cannot be used to offset your other income.
The 50% inclusion rule that applies to capital gains also applies to capital losses. That means you are allowed to offset half the value of your capital loss against your taxable capital gains.
If you have a net capital loss for the year, generally you can apply your net capital losses against taxable capital gains of the three preceding tax years or any future tax years.
Pro Tip: Canada’s Superficial Loss Rule places some restrictions on writing off capital losses. You cannot claim a capital loss if you buy the same cryptocurrency 30 days prior to or 30 days after the sale.
Despite the fact that they were designed for transactions and not for investments, trading away stablecoin is still considered a disposition subject to capital gains taxes (however, your ‘capital gain’ will likely be close to zero).
At this time, the CRA hasn’t released any guidance on how NFTs are taxed. However, it’s reasonable to assume that they’ll be considered capital assets just like cryptocurrencies. Disposals of NFTs — such as selling them or trading them for other NFTs — are subject to capital gains tax.
If you’ve created your own NFT and earned revenue from primary and/or secondary sales, you’ll recognize business income subject to income tax.
DeFi is a rapidly evolving space and the CRA has yet to release clear guidance on some of the common issues associated with it.
However, it’s reasonable to assume that many of the same rules that apply to cryptocurrency will apply to transactions that take place in a DeFi setting. This includes the following:
Let’s look at how cryptocurrency mining is taxed for businesses and hobbyists.
Coins received from mining when the intention is to make a profit on mining is considered business income. Any income from mined cryptocurrency is based on the fair market value at the time of receipt. In addition, you’ll incur capital gains or losses if you decide to sell your coins.
Any costs associated with mining such as mining hardware or electricity costs can be deducted as business deductions.
If you are mining cryptocurrency as a hobby, and are not looking to profit from mining, you will not be taxed when you receive your coins, but you will incur capital gains in the case of a disposal. The mined coins will be considered new assets with a cost basis of zero. Hobby miners are not eligible for business deductions.
Most mining is likely to be considered business activity in Canada, however the CRA has stated that it will determine whether mining operations fall into the business or hobby category on a case-by-case basis. If you’re unsure which category your operation falls under, contact a tax professional.
At this time, the CRA hasn’t released guidance on staking rewards. It’s reasonable to assume that they will be subject to income tax.
It’s reasonable to assume that hard forks will be taxed differently depending on whether you are considered an individual or a business.
If you are an individual, you do not have any income from receiving new tokens resulting from a hard fork. These new tokens are new assets with a cost basis of 0. When you dispose of these coins, you will likely pick up capital gain or loss.
If the fork does not produce a new token and is a continuation of the previous chain, there is no income to report, and you will have the same basis as you had before. Any disposals of these coins result in capital gain or loss.
For businesses, new tokens from hard forks will likely be considered income at the time of receipt.
At this time, the CRA hasn’t released guidance on airdrop rewards. It’s possible that for individuals, receiving airdrops will be considered non-taxable. For businesses, it’s likely that airdrop rewards will be taxed as income at the time of receipt.
At this time, the CRA has not released any guidance on Decentralized Autonomous Organizations (DAOs). These are decentralized protocols where members hold governance tokens and vote on the community’s future.
Some speculate that DAOs will be taxed as flow-through entities. This means that any income that is passed on to members of the DAO will be subject to business income tax.
To accurately report your taxes, it’s important to keep detailed records of your transactions. The CRA recommends that you keep track of the following information:
The CRA recommends that you keep these records for at least six years.
Capital gains from your cryptocurrency transactions should be reported on Schedule 3 Form. Your business income on the other hand should be reported on T2125 Statement of Business or Professional Activities.
Capital losses can be reported alongside capital gains on Schedule 3. 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.
Because transferring cryptocurrency between different wallets and exchanges is so common, it’s often difficult for investors to find information on cost basis that’s needed for tax calculations.
While some investors choose to manually track their transactions using spreadsheets, using crypto tax software can help you save hours of time and effort.
Let’s cap things off by answering a few frequently asked questions on Canadian cryptocurrency taxes.