Three things you should know about crypto taxes
Whether or not you own any cryptocurrencies, you’ve probably heard a lot of about them. This is especially true for the popular ones like bitcoin or Ethereum. Many people prize them for the anonymity they offer, and the fact they aren’t controlled by governments or central banks. But that doesn’t mean you don’t have to pay taxes on cryptocurrencies. In fact, there are important things to know when it comes to how cryptocurrencies are taxed in Canada. The types of transactions you are making and how you report your cryptocurrency income will affect your final tax bill. Read on to learn 3 things you should know about cryptocurrency taxes in Canada.
Cryptocurrency transactions are treated as business income or capital gains
The Canada Revenue Agency (CRA) generally treats cryptocurrency like a commodity. That means any income from transactions involving cryptocurrency is treated as either business income or a capital gain. Conversely, any losses related to cryptocurrency transactions are treated as capital losses.1
Simply owning cryptocurrency does not mean you will have a tax bill. But there could be tax consequences when you do any of the following:
- sell or make a gift of the cryptocurrency
- trade or exchange the cryptocurrency, including selling one cryptocurrency to buy another
- convert cryptocurrency to government-issued currency, such as Canadian dollars
- use cryptocurrency to buy goods or services2
When declaring income related to cryptocurrencies, you must determine if you have business income or a capital gain. The CRA has several rules about this. Generally, if buying and selling cryptocurrency is part of a business, the profits you make on the sale are considered business income. If the sale of a cryptocurrency does not constitute a business activity, and the amount you sell it for is more than you bought it for, then you have a capital gain.3 Most capital gains in Canada are taxed at 50%. This means that you pay taxes on half of the increase in value of your crypto assets when you decide to sell them.
Conversely, if you have a capital loss – you sell your crypto assets for less than you paid for them – you may be able to reduce your tax bill.
Also remember that NFTs (non-fungible tokens) are considered a form of cryptocurrency. Any income you make from selling, trading or exchanging NFTs is taxable.4
Where to report cryptocurrency on your income tax return
If you’ve determined that your cryptocurrency earnings would be considered business income in the eyes of the CRA, you’ll need to complete form T2125, Statement of Business or Professional Activities. If your business income from cryptocurrencies is a negative figure, it’s considered a non-capital loss. This means it can be deducted from any other sources of income you had that year to lower your taxes.
Capital gains or losses are reported on Schedule 3 of your personal income tax return. Remember that capital losses can only be used to offset capital gains, but those gains don’t need to be from other cryptocurrency investments.5
You should also note that if you or your business accepts cryptocurrency as a form of payment for any taxable products or services, you’ll need to calculate and report the owed GST/HST amounts for that sale based on the crypto values that day.6
How to reduce your cryptocurrency taxes
For starters, keep good records of all your cryptocurrency activity. As mentioned earlier, cryptocurrency gains can be offset by capital losses. Such losses can even be carried forward into the future to reduce your tax bill over the long run.
If you donate to a charity that accepts cryptocurrencies, you can claim your contribution on your tax return and offset any capital gains you’ve made for the year. And finally, if you derive all of your income through cryptocurrency trading, you can apply the basic personal amount of $14,398 (the amount you can earn before you start paying taxes) to your earnings to reduce your tax bill.7
Unfortunately, you can’t hold cryptocurrencies in registered tax-sheltered accounts, such as RRSPs and TFSAs. If you want to invest in cryptocurrencies within such accounts, you could opt for crypto-backed ETFs and mutual funds instead.
Also, you cannot currently pay your taxes in bitcoin or any other cryptocurrency. You may only make tax payments in Canadian dollars.8
It might seem that with the anonymous nature of cryptocurrency dealings, it would be easy to hide any money you earn from the government. But the CRA can track your income and conduct audits and investigations to make sure you are reporting your earnings accurately.
The consequences of not reporting cryptocurrency income are the same as not reporting Canadian dollar income, which can be considered tax evasion.9 It would be wise to consult a professional if you are unsure about how to pay taxes on your cryptocurrency income.