Is cryptocurrency taxable in Canada?

First things first — yes, cryptocurrency is taxable in Canada. So, anyone who wants to invest in cryptocurrency needs to be aware of the laws. After all, you don’t want to disappoint yourself by overestimating your profits by forgetting about taxes and spending more money than you have.

The Canada Revenue Agency and crypto: an overview

According to the CRA, Canadians have to pay taxes on cryptocurrency. However, it’s not considered legal tender. Instead, the CRA treats it like they would a commodity in the Income Tax Act. That means that gains and losses need to be reported from selling or buying; failure to report gains and losses from such transactions is illegal, even if it’s via conversion of one digital currency to another. As such, anyone familiar with taxation rules for commodities will have a head start on understanding cryptocurrency taxes.

Cryptocurrency is also treated like a capital gain or business income for those who earn profits from crypto transactions. If you experience a loss, it translates to a capital loss or business loss. Notably, the taxpayer has to outline crypto transactions that lead to capital gains or income. Not every cryptocurrency transaction counts as business activity.

In addition to those two methods of looking at cryptocurrency for taxes, it can also be treated as a barter transaction. This is the case when someone uses crypto to pay for a service or goods. As a refresher, a barter transaction is an exchange of goods or services without any legal currency. Since the CRA doesn’t consider cryptocurrency to be legal tender, it counts as barter.

Keep in mind that in terms of business income, 100% of cryptocurrency profits are taxable. For capital gains, this drops to 50% taxable.

Determining the value of cryptocurrency for taxes

Canada officially requires taxpayers to use a “reasonable method” to figure out a cryptocurrency’s value in a transaction where it is not obvious. The CRA typically says that the fair market value is the most a well-informed person will pay for it. Canadians need to keep records of how they figured this out, as this will let them prove their logic to the CRA if necessary. You should also be consistent; if you use the value from one exchange broker one time, you should always use data from that same broker. Or if you use an average once, you should consistently apply that.

When cryptocurrency is taxed

Canadians do not typically have to pay any taxes to hold a cryptocurrency. However, doing any of the following leads to tax liability:

• Gifting cryptocurrency

• Selling cryptocurrency

• Exchanging or trading cryptocurrency, including converting between cryptocurrencies

• Converting from cryptocurrency to CAD or another fiat currency

• Buying goods or services with cryptocurrency

When cryptocurrency counts as business income

The way that Canadians report their cryptocurrency on their taxes will depend on whether it is a capital gain or business income.

The CRA uses the following signs to categorize cryptocurrency as business income:

• There is an intention to make a profit (regardless of the likelihood of short-term profits)

• A product or service is promoted

• The activity is for commercial reasons, done in a commercially viable way

• Activities are done “in a business-like manner” (such as acquiring inventory or capital assets or making a business plan)

The CRA considers cryptocurrency mining, trading, exchanges, and ATMs to all be cryptocurrency businesses.

Keep in mind that entrepreneurs who are still in the early stages of a cryptocurrency business may not need to report it until the following year’s taxes.

In most cases, the activities need to be repeated for the CRA to categorize them as business income. But sometimes, just one transaction is enough.

Those who aren’t sure whether their cryptocurrency would be considered business income should work with a tax accountant familiar with cryptocurrency taxation in Canada. The Interpretation Bulletin IT-479R can help individuals figure it out themselves, but some situations just need that professional touch.

"According to the CRA, Canadians have to pay taxes on cryptocurrency. However, it’s not considered legal tender."

When cryptocurrency is a capital gain

Canada taxes cryptocurrency as a capital gain if:

• Selling it is not business income and

• The person makes a profit from selling it

When filing taxes, Canadians need to list any capital gains from selling cryptocurrency in the income portion of their taxes. Remember that the taxable capital gain is only half of the total capital gain.

Taxpayers can also offset capital losses from selling cryptocurrency with these capital gains. However, no one can offset losses from other sources by the cryptocurrency capital gains. For example, suppose someone earns less in their employment income than expected. In that case, this cannot offset the cryptocurrency-related capital gains.

In cases where there are greater capital losses than capital gains, the losses can be carried forward. This can be done for up to three years.

Use adjusted cost basis for capital gains

Canadians must use the adjusted cost basis (ACB) or average cost to calculate their capital gains. This means that taxpayers have to average the cost of their purchases in the case of identical properties.

In simple terms, this means that people must calculate a single average for each cryptocurrency. For example, let’s say someone buys Bitcoin at two different times in the year and Ethereum at three different times and sells them all within the same year. In that case, the adjusted cost basis would be the average of the two Bitcoin purchases for BTC and the average of the three Ethereum purchases for ETH.

How are specific cryptocurrency transactions taxed?

Looking at technical terms for classifying cryptocurrency transactions on taxes can be confusing. To clarify the taxation a bit more, consider the following situations and how each would be taxed.

Day trading cryptocurrency

If someone chooses to day trade cryptocurrency, it means they buy and sell it for short periods of time to make a profit. The Canadian Revenue Agency classifies day trading as a commercial income.

So, someone’s net profits from day trading cryptocurrencies minus their net losses need to be reported on their income tax return.

Mining cryptocurrency

Mining is when a person uses a computer to complete mathematical problems and confirm cryptocurrency transactions. How a person classifies this depends on whether mining is a business or hobby.

It is subject to capital gains tax for hobbyists. Importantly, the cost basis is zero, and the CRA doesn’t allow deductions.

In the case of business, it counts as inventory. This requires valuing the crypto at acquisition cost or its fair market value.

Holding cryptocurrency

Canada does not charge any taxes on cryptocurrency that a taxpayer just holds.

Transferring cryptocurrency between wallets

There is also no tax when someone moves their cryptocurrency between two wallets, exchanges, or accounts.

This is, however, another situation where records are vital as the price paid for the crypto in the original wallet will be used to calculate the cost basis.

Buying cryptocurrency

There are no taxes for buying cryptocurrency either.

That said, anyone who buys cryptocurrency intending to hold on to it should keep accurate records. The value at the time of purchase will be necessary to calculate the cost basis in the future when or if the cryptocurrency is sold.

Selling cryptocurrency for fiat

When someone sells cryptocurrency for fiat like CAD, this will be taxed as a capital gain. Remember that each cryptocurrency must be listed separately.

Calculating the cost basis will require the price at both the time of purchase and the time of sale.

Selling one cryptocurrency for another

When someone sells a cryptocurrency in exchange for another cryptocurrency, this is also taxed as a capital gain. To calculate the cryptocurrency’s value at the time of sale, look at the value of the cryptocurrency being sold.

As an example, consider someone buys 1 of Crypto A for $100 (CAD). Then, a few months later, they exchange it for 3.0 of Crypto B. When calculating the capital gains, look at the value of the 3.0 of Crypto B at the time of the exchange. Assuming it was worth $200, the person would report a capital gain of $100 for Crypto A.

Using cryptocurrency to make a purchase

The CRA considers using cryptocurrency to buy something as bartering. As such, taxpayers would do a similar calculation when they sell a cryptocurrency.

As with selling one crypto for another, they must determine the value of the goods or services bought with the crypto. This then counts as the amount that the cryptocurrency was sold for.

Earning cryptocurrency

Those who earn cryptocurrency for their work will have to report it as income. This involves reporting its value at the time of acquisition.

The bottom line

The most important point is that Canada taxes cryptocurrency earnings. Because this type of taxation is still fairly new and may evolve, it is typically smartest to consult with a tax accountant specializing in cryptocurrency. The easiest way to ensure you are following the proper protocol is to have the expert complete your taxes. You can also hire an expert to confirm whether your cryptocurrency profits should be reported as business income or capital gains. As with any investment, it’s smart to understand how your transactions will be taxed before you begin investing in cryptocurrency.

Luckily, the Canadian Revenue Agency (CRA) has clear guidelines on cryptocurrency and taxes, so there shouldn’t be any confusion.