Taxes in Canada and Cryptocurrency

As we head into tax season, you might wonder how you factor your cryptocurrency earnings into your tax filing and ensure that you are paying the necessary income taxes. Cryptocurrency trading and investment are now regular line items in your taxes and are treated the same way as earning fiat currency. That means they are subject to Federal and Provincial taxes as outlined by the CRA, and not reporting your crypto income is considered an offence with legal consequences. Here is your guide to paying taxes in Canada when cryptocurrency is a part of your income.

Do I Need to Report Cryptocurrency on My Taxes in Canada?

Cryptocurrency is not recognized by Canadian law as currency. Instead, crypto assets are treated as commodities equivalent to investment property for tax purposes. Any gains or losses arising from a person’s cryptocurrency portfolio are taxed similarly to any other commodity investment in Canada. You will pay income tax on half of any crypto gains from dispositions of crypto and income tax on any additional income from crypto like staking.

The following crypto events are subject to taxes in Canada:

• Trading or exchanging cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency

• Converting cryptocurrency to government-issued (fiat) currency, such as Canadian dollars

• Selling or gifting cryptocurrency to others

• Using cryptocurrency to buy goods or services

The income you receive from disposing of cryptocurrency may be considered business income or a capital gain and must be reported as either property income or business capital.

How Much Are You Taxed on Crypto in Canada?

The tax you will pay on crypto in Canada will depend on the kind of transaction (income or capital gain) and how much you earn. You will pay income tax at your usual Federal and Provincial tax rates for transactions viewed as income. For transactions considered capital gains, you will pay income tax at your usual Federal and Provincial tax rates on half of any gain.

Crypto transactions considered capital gains refer to investments made on a casual basis as general investments. In contrast, transactions considered business income refer to investments made as a business with profits taxable as business income. When determining whether you are acting in a personal or business capacity, the CRA will consider several factors, including:

• The intention of the taxpayer

• Nature and frequency of the transactions

• The period of ownership

• The taxpayer’s expertise and knowledge of cryptocurrency

• The relation, if any, between the crypto transactions and the taxpayer’s ordinary business

• Time spent engaged in cryptocurrency activities

• The type of financing required to support the taxpayer’s crypto activities

• Whether the taxpayer has made it known that they are engaged in crypto activities

Each cryptocurrency situation is assessed separately. While business activities commonly involve regularity over time, buying cryptocurrency may be treated as a business if there is any intention of selling it for a profit. The CRA has listed some common signs that you may be conducting crypto transactions as a business:

• You carry on activities for commercial reasons and in a commercially viable way.

• You undertake activities in a business-like manner, which might include preparing a business plan and acquiring capital assets or inventory.

• You promote a product or service.

• You show that you intend to make a profit, even if it is unlikely in the short term.

In general, the more active you are in crypto trading and the more profit you make, the more likely your crypto profits will be considered business income instead of capital gains. A tax accountant can ensure that you accurately report your crypto earnings as business income or capital gain.

How Do I Avoid Crypto Taxes in Canada?

If you are active in the cryptocurrency community, then there is no way of getting around the reach of the CRA, and it is not a good idea to try. However, some specific crypto transactions are tax-free in Canada. You won’t pay taxes on cryptocurrency if:

• You are buying crypto with fiat currency

• You are HODLing crypto

• You are moving crypto between your own wallets

• You are gifted with crypto

• You are creating a DAO (Decentralized Autonomous Organization)

A critical omission from tax-free crypto transactions is that of donating crypto. If you donate crypto to a registered charity, the CRA views this as a disposition of an asset with tax consequences. If your crypto has increased in value from acquisition to the time you donate, you will be liable for Capital Gains Tax on that donation. 

Can the CRA Track Cryptocurrency?

If you are thinking about doing anything sneaky to avoid paying taxes on your cryptocurrency, give it a second thought. The CRA can track crypto investments and implement appropriate penalties for crypto tax evasion. Failing to pay your crypto taxes will most likely lead to the CRA requiring you to pay what you owe, along with interest and a filing penalty. You could end up losing all your gains in the process.

The CRA announced they are working with crypto exchanges to share customer information to monitor potential tax evasion on crypto earnings. They use the information to track Canadian crypto investors to ensure they accurately report their crypto investments and pay the appropriate tax. Additionally, all money services businesses in Canada must notify the CRA of transactions greater than $10,000. This means that if you send $10,000 or more to a crypto exchange, it will be reported to the CRA.

The CRA is registered with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), which regulates financial institutions and investigates money laundering and tax evasion. Reported trades are not limited to those above $10,000. If a crypto exchange is registered with FINTRAC, they must obtain a copy of your government-issued ID and proof of address. This means that your ID is linked to your account and wallet addresses on the exchange.

The best way to remain tax compliant is to report your cryptocurrency earnings accurately. A tax accountant with extensive knowledge of cryptocurrency can ensure that you are reporting your crypto earnings accurately and honestly. Contact the tax accountants at Blackspark for assistance with your cryptocurrency income this tax season.

This blog post is intended to provide general information only and should not be construed as tax advice or opinions. Always consult a qualified accountant before making any decisions regarding your tax situation.