Cryptocurrency and Taxes in Canada
It's tax season again, and if you’re a Canadian investor, you might be wondering how cryptocurrency fits into the equation. Are crypto investments taxed? If so, how much? There are many questions that need to be answered when it comes to taxes and cryptocurrency in Canada, so let’s dive in!
What is Crypto?
Let's begin by defining cryptocurrency. Cryptocurrency is a digital asset that can be exchanged for goods or services. Cryptocurrency is not legal tender and operates independently of a central bank, authority, or government. Strong encryption techniques are used to control how units of cryptocurrency are created and verify transactions.
How is Crypto Taxed in Canada?
In general, The Canada Revenue Agency (CRA) treats cryptocurrency like a commodity for purposes of the Income Tax Act. As such, cryptocurrency transactions are subject to taxation. Depending on the circumstances, any income from cryptocurrency transactions is generally treated as business income or capital gains. Similarly, if earnings qualify as business income or capital gains, then losses are treated as business losses or capital losses. Taxpayers must figure out whether any cryptocurrency activity results in income or capital, as this affects how the revenue gained from such activities is taxed under income tax law. Not all taxpayers who engage in buying and selling cryptocurrencies are considered to be carrying on business activity.
What is Crypto Fair Market Value?
You'll need to report the cost basis and fair market value of your cryptocurrencies at the time of transacting. This is important because it will determine whether you have made a profit or loss on the transaction. For example, if you bought one Bitcoin for $10K and then sold it later for $11K - you would have made a $1K profit. On the other hand, if you had bought one Bitcoin for $10K and then sold it later for $9K - you would have incurred a loss. The tax treatment of the profit or loss depends on whether or not your cryptocurrency transactions are considered business income or not. If they are considered business income, then (net) profits are considered taxable income and (net) losses can be used as a deduction against any other taxable income. Alternatively, if your cryptocurrency profits and losses are considered capital gains or losses, then (50%) of your net profits will be taxable income and net losses can be used to offset other capital gains in the current, three prior, and any future tax years.
In order to ascertain the value of a cryptocurrency transaction where a direct value cannot be determined, you must use a reasonable method. Keep detailed records to show how you calculated the value. The CRA's general stance is that the fair market value is the highest price (in dollars) that a willing buyer and a willing seller (that are both informed, knowledgeable and prudent, and acting independently) would agree upon in an open, unrestricted market. Use the same method consistently when ascertaining transaction values.
Keeping Accurate Crypto Records
The CRA also requires investors to keep records of all their trades so they can accurately calculate their gains or losses during tax season. This includes keeping track of the date each trade was made along with the cost basis and fair market value. It's also important to note that there may be other taxes that apply such as GST/HST depending on where you live in Canada and what type of transactions you're making with your cryptocurrency (i.e., buying/selling goods or services).
Conclusion
Cryptocurrency has become increasingly popular over the past few years - especially among Canadian investors looking for alternative investments outside traditional stocks and bonds. However, it's important to understand how taxes work when investing in crypto assets here in Canada as this can affect the accuracy of your tax return. If you need help at tax time, a Blackspark professional accountant can help you properly report your crypto activities. With their assistance, you can ensure you are compliant with CRA rules and regulations.
Reference:
If you're looking for more information on how the CRA is treating cryptocurrency transactions in Canada, please visit their website for the most up-to-date guidelines and regulations: Guide for cryptocurrency users and tax professionals - Canada.ca
Thank you for reading!
This blog post is intended to provide general information only and should not be construed as tax advice or opinions. Please consult with a professional chartered accountant before making any decisions related to tax reporting of cryptocurrency investments.
