Canada's 2022 tax season is here. As in prior years, the Canadian Revenue Agency (CRA) is looking closely to ensure that all Canadian taxpayers are providing accurate information regarding their cryptocurrency trading activity. To assist with this, Coinsquare is providing our clients with this guide on how cryptocurrencies are treated for tax purposes in Canada, as well as information about partnerships we’ve made to make filing your taxes easier.
Nothing in this guide is intended to be formal tax advice. It is important that you consult with a registered tax advisor or other financial professional regarding your tax situation. This guide is for informational purposes only.
How Does the CRA Categorize Cryptocurrency?
As the CRA states in their cryptocurrency guidelines ‘any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances’. This implies that clients have a reporting obligation to the CRA, and that each individual must declare whether they are claiming their activity to be taxable as business income or capital gain/loss.
What is a Taxable Event?
The most important question you might have is what activities are considered taxable events in cryptocurrency. Do I need to pay taxes for just buying crypto? What about when I sell? Or swap between two different cryptocurrencies?
If you’re simply buying and holding, no need to worry. The CRA has stated that ‘possessing or holding a cryptocurrency is not taxable’. Tax issues only arise when you make a ‘disposition’. This means when you sell, trade, transfer or give your cryptocurrency to someone else.
As stated in the CRA guidelines, taxable cryptocurrency events may include:
selling or make a gift of cryptocurrency
trading or exchanging cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency
converting cryptocurrency to government-issued currency, such as Canadian dollars
using cryptocurrency to buy goods or services
If you have made any one of these four types of activities in the past year, you may need to report it to the CRA.
Capital Gains or Business Income Gains?
In certain cases, you might be required to report your cryptocurrency trading profits as business income, rather than an ordinary capital gain. The CRA may also determine after the fact that your cryptocurrency trading activities are business income, rather than capital gains. This happens rarely, but can cause the profits to be taxed at a higher rate. The CRA uses a number of factors to determine whether cryptocurrency trading profits are classified as returns on investment (capital gains) or income from running an active business (business income). These factors include:
Whether day-trading cryptocurrencies is your primary source of income.
The total volume and period of time between your cryptocurrency buys and sells.
The time spent researching cryptocurrency markets and planning future actions.
Whether you use any outside financing to support trading (i.e. margin trading).
Whether you are advertising or promoting your engagement in trading cryptocurrencies.
If one or more of the above describe your approach to cryptocurrency trading, it is possible that the CRA will consider your profits to be business income. If this is the case, we recommend that you contact a tax specialist who can assist you in determining whether your cryptocurrency profits should be reported as business income.
Reporting Capital Gains/Losses
Most of the time, investors will report their cryptocurrency transactions as capital gains/losses. If you sold a cryptocurrency for more than you bought it for, and made a profit, this is called a capital gain. Capital gains from the sale of cryptocurrency are generally included in income for the year, but only half of the capital gain is subject to tax. This is called the taxable capital gain.
If you sold a cryptocurrency for less than you bought it for, you have incurred a capital loss. Any capital losses resulting from the sale can only be offset against capital gains; you cannot use them to reduce income from other sources, such as employment income. You can carry forward your capital losses if you do not have any capital gains against which to offset those losses for the year or any of the preceding three years.
To figure out your capital gains or losses, you have to compare the price at which you sold your cryptocurrencies to your adjusted cost base, meaning the original purchase price, plus any fees or commissions paid.
Swapping One Cryptocurrency for Another
Coinsquare and other digital asset exchanges make it easy to trade one type of cryptocurrency directly for another. The downside is that each swap between cryptocurrencies is considered a “disposition” of the currency you are selling, and is a taxable event.
The same rules above apply to crypto-to-crypto trades as crypto-to-fiat trades. You would need to find out the value of the cryptocurrency you received in Canadian dollars, compare that with the dollar value you paid to acquire the cryptocurrency you sold, and report the resulting gain or loss on your tax returns as a capital gain or business income.
For example, let’s say you bought 1 Bitcoin for $10,000 CAD. A while later, you wanted to use that Bitcoin to buy Ethereum using Coinsquare Trade. By then, the value of your 1 BTC has risen from $10,000 CAD to $20,000 CAD. When you make the trade for ETH, you are considered to have ‘disposed’ of your BTC at a value of $20,000, resulting in a capital gain of $10,000 that needs to be reported.
Why You Should Use a Crypto Tax Prep Service
Crypto tax-prep services are an important tool for investors who use multiple exchanges or wallets to buy, sell and transfer cryptocurrency. Unlike with a traditional stock broker, cryptocurrency exchanges facilitate deposit and withdrawal of assets, in addition to trading. This means that one exchange’s transaction history might not have enough information to calculate your adjusted cost basis for an asset you deposited from elsewhere. Furthermore, direct, cryptocurrency-to-cryptocurrency transactions (a unique Coinsquare feature) also creates difficulties in calculating the adjusted cost base for tax purposes.
Tax-prep services can be used to fill in the gaps and merge information across multiple exchanges to accurately prepare a statement of gains/losses for cryptocurrencies. Coinsquare is happy to announce that we’ve partnered with CoinTracker, a tax-prep service to make the filing process easier for you.
With our partnership, Coinsquare customers can use this custom link to prepare up to 1000 Coinsquare transactions with CoinTracker free of charge.
How to Get Your Transaction Summaries
For clients on the Coinsquare Trade app, or who have migrated from the older Coinsquare platform to Coinsquare Trade, you can follow the instructions in this guide to download your tax summaries directly from your profile.
For clients who only have accounts on the older Coinsquare platform, you can request a copy of your transaction history by filling out this request form.
Cryptocurrency taxes can be complex, but good record keeping and information helps to make it easier. For information & discussion of more topics, we recommend that you visit the CRA’s official guidance on cryptocurrency taxes and obtain the services of a registered tax professional if necessary. Finally, for any questions about transactions or your Coinsquare account, feel free to reach out to email@example.com.