Investor’s Guide to Canada Cryptocurrency Taxes

The interest in cryptocurrency has skyrocketed in recent years due to its potential returns. This has drawn an increasing number of Canadians into the cryptocurrency markets. However, cryptocurrency is a rather new innovation and thus different taxation guidelines apply. In this article, our team at Tetra Consultants will bring you through Investor’s Guide to Canada Cryptocurrency Taxes which can help you decide on whether to set up cryptocurrency company in Canada.

Is cryptocurrency taxable in Canada:

Cryptocurrency is treated as a commodity for purposes of the Income Tax Act by the Canadian Revenue Agency (CRA). There are generally two ways in which the income received from the transactions can be treated as, namely – business income or capital gain. This depends on whether the transaction is from “a business” or “hobby”. In a similar vein, the losses will also be treated as business losses or capital losses during tax reporting.

The purpose of differentiating between business income and capital gains would be because it would be taxed differently. The business income will be 100% taxable whereas the capital gains will only be 50% taxable.

In addition, the amount of tax that you are required to pay will be based on the tax bracket that you fall under. As of 2021, the Canada tax rate is as follows:

• 15% on the first $49,020 of taxable income, plus
• 20.5% on the next $49,020 of taxable income, plus
• 26% on the next $53,939 of taxable income, plus
• 29% on the next $64,533 of taxable income, plus
• 33% of taxable income over $216,511

How to determine between business income and capital gains?

Cryptocurrency business can be classified as the following:

• Operations in a business-like manner which includes business plans, investments, etc.
• Promoting a product or service
• Intention to be profit-making in the long term

 If you are unsure how your cryptocurrency transactions should be taxed, feel free to contact us for a non-obligatory consultation. Our team of experts will revert within the next 24 hours.

Example of business income tax

If you have a net profit of $100,000, the full amount of $100,000 should be reported as business income for your tax return.

Example of capital gain tax

If you sell your cryptocurrency at a net gain of $4,000, 50% of the gains are taxable. Hence, $2,000 should be reported for your tax return.

 Similarly, losses can be used to offset the gains in the next year, reducing tax liability.

The strategy of investors selling cryptocurrencies that value has decreased in order to reduce their overall tax bill is referred to as tax-loss harvesting.

 It is important to note that the 50% rule applies to both capital gains and losses. Whereas for businesses, it will be 100% instead of 50%.

According to Canada’s Superficial Loss Rule, capital losses cannot be claimed if the same cryptocurrency was bought 30 days before or after the sale.

Adjusted cost basis (ACB):

ACB costing method is required by the CRA for the calculation of your cryptocurrency gain or losses. ACB is the total average cost of each unit of the cryptocurrency. For instance, you bought 1 unit of cryptocurrency each in 3 different months at $10,000, $20,000 and $30,000. The ACB would be the average which is $20,000.

Is there any way to avoid cryptocurrency taxes in Canada?

It is not legal to avoid cryptocurrency taxes. Although cryptocurrency transactions are conducted anonymously, the CRA is able to track them. The CRA has announced that they are indeed working together with crypto exchanges for the sharing of customer information. By using the customer information, they are able to verify whether cryptocurrency investors are misreporting their business income or capital gains. Hence, it would be wise to stay compliant and report your crypto taxes accurately.

Is holding cryptocurrency taxable in Canada?

The short answer is no. There will be no taxes for holding cryptocurrency. It is only through dispositions where cryptocurrency is taxable.

Examples of cryptocurrency dispositions include:

• Exchanging cryptocurrency for fiat 
• Trading cryptocurrency for other cryptocurrencies 
• Buying goods and services with cryptocurrency 
• Giving cryptocurrency as a gift 

‍Many of you might wonder if moving cryptocurrency between wallets is considered a disposition. It is not considered a cryptocurrency disposition and thus it is not subjected to taxes.

Is Stablecoins taxable in Canada?

Yes, trading of Stablecoins is considered as a disposition although they are designed for transactions instead of investments. Hence, it is subjected to capital gain taxes. However, the capital gain will most likely be close to zero in which the taxes would be negligible as well.

Is the mining of cryptocurrency taxable in Canada?

The mining of cryptocurrency as a business can be reported as a business income and business deduction is applicable.

Similarly, the 50% rule applies to the mining of cryptocurrency as a hobby. However, the business deduction is not applicable for mining cryptocurrency as a hobby.

How to file cryptocurrency taxes in Canada?

1. Keeping books and records of transactions

The CRA recommends the recording of the following:

• the date of the cryptocurrency transactions
• the receipts of cryptocurrency transactions
• how much the cryptocurrency is worth in Canadian dollars at the point of the transaction
• the cryptocurrency addresses and digital wallet
• the transaction description
• the exchange records
• the accounting and legal costs
• the software costs used for managing taxes

It is recommended to keep these records for at least 6 years in the event of an investigation.

 2. Reporting cryptocurrency taxes

• Schedule 3 Form can be used to report capital gains.
• T2125 Statement of Business or Professional Activities can be used to report business income.

Is the mining of cryptocurrency taxable in Canada?

The mining of cryptocurrency as a business can be reported as a business income and business deduction is applicable.

Similarly, the 50% rule applies to the mining of cryptocurrency as a hobby. However, the business deduction is not applicable for mining cryptocurrency as a hobby.

Conclusion:

There are numerous benefits in setting up a cryptocurrency company in Canada such as the strong banking sector and the thriving fintech industry. Hence, It is important to know Canada’s cryptocurrency taxes before you set up cryptocurrency company in Canada. 

Tetra Consultants assist cryptocurrency companies with their regulatory and licensing needs and provide continued support and assistance to financial companies with regard to all aspects of entity formation and submission of cryptocurrency license application.

In addition, Tetra Consultants team of licensing experts is proficient with attaining other offshore financial licenses depending on your long-term business goals.

Contact us to find out more about how to register company in Canada as well as secure a Canada MSB License to conduct cryptocurrency activities. Our team of experts will revert within the next 24 hours.