The 2021 Tax Season is upon us. It’s apparent that the Canadian Revenue Agency (CRA) is looking more closely to ensure that all Canadian taxpayers are providing accurate information regarding their cryptocurrency trading activity. Coinsquare thought it would be beneficial to provide our clients with a guide on how cryptocurrencies are being treated for tax purposes in Canada.
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 is the CRA treating cryptocurrency trading for tax purposes?
Referencing the CRA’s cryptocurrency guidelines, they have stated ‘any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances. Similarly, if earnings qualify as business income or as a capital gain then any losses are treated as business losses or capital losses.’ This guideline implies that clients have a reporting obligation to the CRA.
What information is required to file?
As with other assets, in order to calculate your taxable income for cryptocurrencies, you will need a yearly transaction summary that includes the following information:
- Dates of all deposits, withdrawals, buys and sells.
- Receipts or confirmation of transactions completed.
- A record of the Canadian Dollar value of each transaction.
- Wallet addresses used to transfer and store cryptocurrencies.
- A record of any accounting, legal, or software costs incurred while running a cryptocurrency business, if applicable.
When do you need to pay taxes on cryptocurrency?
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 hodling, 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.
Taxable cryptocurrency events may include:
- Selling cryptocurrency for Canadian Dollars (CAD) or another fiat currency
- Trading or exchanging one cryptocurrency for another cryptocurrency
- Using cryptocurrency to buy goods or services
- Giving cryptocurrency as a gift to another person
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.
Reporting Capital Gains on Cryptocurrencies
Let’s say that you sold a cryptocurrency for more than you bought it for, and made a profit. Generally, as an investor, this will be booked as 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.
On the flip side, 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.
Business Income and Cryptocurrencies
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 treated as business income.
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 in 2020. A while later, you wanted to use that Bitcoin to buy Ethereum using Quick 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.
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 here 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.
1 Guide for Cryptocurrency Users and Tax Professionals, Canada Revenue Agency, 2019