What You Need to Know About Cryptocurrency and Canadian Taxes

Although it's not fiat currency, crypto is still very real to the CRA

When Bitcoin and cryptocurrencies first became popular, many people saw their investments in them – and maybe their use of them – as something separate from the rest of their income, as they are not fiat (aka ‘real’) currencies. Following this logic, they don’t think that such investments and transactions need to be discussed at tax time. But that’s not the case at all.

Cryptocurrency taxes in Canada are not always clear, even to the CRA. But, ‘real’ currency or not, you will need to report your cryptocurrency activity on your taxes. You will pay either Capital Gains Tax or Income Tax on your investment, depending on whether it is considered as a capital gain or a business income.

Is it Possible for the CRA to Track Crypto?

Certainly, the Canada Revenue Agency will be able to trace your cryptocurrency assets. In a recent release, the CRA stated that it was working with crypto exchanges to share client information. Using this information, they can track Canadian crypto investors to guarantee they’re appropriately reporting their crypto assets and paying the necessary amount in crypto taxes.

Apart from Coinsquare, the CRA has not revealed which cryptocurrency exchanges it is collaborating with. So Coinsquare almost certainly isn’t the only cryptocurrency exchange that shares data with the CRA. The CRA sent the same data request to all the large Canadian crypto exchanges, including Coinbase, CoinSmart, Crypto.com, and others.

FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), which oversees financial institutions and investigates tax evasion and money laundering, also shares information with the CRA.

The key to keeping tax compliant is appropriately reporting crypto taxes, as, at some point, even if they don’t know about all your specific crypto investments just yet, the tax authorities will catch up eventually and that could lead to more headaches than you need.

In Canada, how is cryptocurrency taxed?

The CRA considers bitcoin to be a commodity. As such, it is either taxed as income or as capital gains.

If you are taxed on crypto as income, you will have to pay income tax on all of your crypto transaction proceeds. If your crypto transaction is taxed as a capital gain, you will have to pay Capital Gains Tax on half of the earnings.

So, how do you know whether your bitcoin is taxable as income or as a capital gain? It is critical to assess if your investment in crypto is a capital gain or a business income, as once again, it could result in all kinds of problems if you get it wrong.

Profit from a business or a capital gain?

The CRA determines what constitutes business income and capital gains on a case-by-case basis. An investor’s business income from one transaction may be taxed, while a capital gain from subsequent transactions made by the same investor may be taxed. It’s annoyingly confusing.

There are, fortunately, some rules to follow here. The CRA identifies the following as common signals that you may be earning business income from your cryptocurrency activities:

Crypto activity is carried out for monetary gain.
Your business or product will be promoted with crypto – for example, if you offer it in a giveaway.
You’ve demonstrated your desire to profit from your cryptocurrency activities.
You participate in crypto activities on a regular or repeated basis.

Many Canadian crypto investors earn business income rather than capital profits, therefore it’s possible that they’re OK to be classified as such.

The more active you are in crypto trading, the more likely your earnings will be deemed business income rather than Capital Gains. Consult a Canadian accounting firm for expert tax guidance on your investments and their consequent taxation.

Cryptocurrency Capital Gains Tax in Canada

Because cryptocurrency is a capital asset, you’ll have to pay capital gains tax if you sell, trade, spend, or give it. The following are examples of bitcoin disposals that may trigger Capital Gains Tax:

• You sell cryptocurrency for fiat currency (ie: Canadian Dollars)
  You exchange one form of crypto for another
  You are buying and selling products and services with cryptocurrency.
  You’re giving out cryptocurrency as a gift.

Only the earnings from selling, swapping, spending, or donating your cryptocurrency will be liable to Capital Gains Tax. You will only have to pay capital gains tax on half of your net capital gains each year if you are a Canadian citizen.

In Canada, there are no specific Capital Gains Tax rates, nor are there any short-term or long-term Capital Gains Tax rates. Cryptocurrency capital gains are taxed at the same rate as federal and provincial income taxes. Only half of your capital gains, however, are taxed.

As you can now see, the issue of taxes and cryptocurrency in Canada is not a straightforward one. To ensure you get everything right in your particular case (especially if you are a business owner) consulting with a tax professional like K.K. Chartered Professional Accountants is a smart idea. Contact us today to book an appointment.