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Accountant's Canadian Crypto Tax Guide

Accountant Resources

Accountant’s Canada Crypto Tax Guide

Last updated: Tuesday, 9 August 2022

The CRA is clear that crypto is taxed - but many Canadian investors struggle to navigate the minimal tax guidance the CRA has available. This is why thousands of Canadian investors turn to a crypto accountant to help them! Crypto accountants have never been in more demand in Canada, so it benefits you to know the rules. We’ve got everything you need to know in our Canadian Accountant’s Crypto Tax Guide. 

Crypto might seem complicated - but accountants shouldn’t be put off by a lack of understanding of the cryptoverse, because crypto accountants have never been more in demand in Canada.

To get you started, we’ve put together our Accountant’s Guide to Canada Crypto Tax, with the latest guidance from the CRA which includes everything you need to know about crypto taxes in Canada. We’d also recommend bookmarking our other helpful resources from the Koinly Crypto Tax Academy.

  1. Crypto Tax Glossary.
  2. Canada Superficial Loss Rule & Crypto.
  3. Canada Crypto Tax Statistics
  4. Canada Crypto Tax Benefits for Married Couples.

Want more resources? No problem. We’ve got exchange tax blog posts for some of the most popular Canadian exchanges including NDAX, Newton, Shakepay and Wealthsimple. You can find the links to these at the bottom of this guide.

As well as this, if you want to help your client gain a better understanding of their crypto tax obligations in Canada, we’ve also got our Ultimate Canada Crypto Tax Guide.

With all that out of the way, let’s get started.

Not sure whether it’s worth your time to get into a new market? Well, the number of crypto investors in Canada just keeps growing.

A study by Finder shows that 12.7% of Canadians now own some kind of cryptocurrency - and although Bitcoin remains the most popular coin, altcoins like DOGE, ETH, SOL and XRP are more widely invested in overall. 

This means that there's an estimated 4.5 million Canadian crypto investors. Yet our own research shows that when it comes to crypto taxes, investors are less than clear. Our survey showed that 33% of Canadian crypto investors said they did not know about crypto tax reporting requirements, while 19% said they would not include crypto in their tax return. Meanwhile, 34% of investors stated they would use a crypto accountant to file on their behalf.

What does all this mean for you and your accounting firm? There’s millions of Canadian investors out there looking for help calculating and filing their crypto taxes - and they’ll be looking at you to help them!

How does the CRA view cryptocurrency?

The Canada Revenue Agency (CRA) has some - albeit limited - guidance on cryptocurrency tax. We’ll keep it brief, and expand with examples later in the guide, but here’s the ten-point summary: 

  1. Crypto is a digital representation of value or asset that is not legal tender. It may also be referred to as a crypto asset or altcoin and work as a medium of exchange for goods and services.
  2. The CRA generally treats cryptocurrency like a commodity for the purposes of the Income Tax Act.
  3. Any income from crypto transactions is generally treated as business income or as a capital gain, depending on the specific transaction.
  4. If earnings are viewed as business income, losses will be treated as business losses. If earnings are viewed as a capital gain, losses are treated as capital losses.
  5. Taxpayers must establish whether a cryptocurrency activity results in income or capital because this dictates the way earnings are treated for Income Tax purposes.
  6. When you use crypto to pay for goods or services, the CRA treats it as a barter transaction for Income Tax purposes.
  7. A disposition of cryptocurrency includes selling crypto, trading crypto, gifting crypto, spending crypto and converting crypto to government-issued currency.
  8. When considering if a client is making business income or a capital gain, you should consider whether their activity is commercial, whether they undertake activities in a businesslike manner, whether they show they tend to make a profit, and whether their activities are regular or repetitive. If so, they may have business income. If not, they are more likely to have a capital gain.
  9. A single transaction may be considered business income. 
  10. Only half of a capital gain is subject to Income Tax.

When does crypto trigger a CGT event?

A disposition of crypto - like the disposition of any other property - triggers a Capital Gains Tax event. Dispositions include:

  • Selling crypto for CAD or converting crypto for CAD, or any other fiat currency.
  • Swapping crypto for crypto, including stablecoins and NFTs.
  • Spending crypto to purchase goods and services.
  • Gifting crypto.

In Canada, if the CRA views your client’s earnings as a capital gain, they’ll only pay Income Tax on half that capital gain. Similarly, for any dispositions that result in a capital loss, they would only be able to offset half that loss against gains. 

We’ll look at examples of this a little further down.

Adjusted cost basis method

As with general property accounting, to calculate a gain or loss, we first need to know the cost basis of the property. 

If earnings are considered a capital gain, the CRA is clear that investors should use the adjusted cost basis method (ACB) - that is, the cost of the property, plus any expenses to acquire it.

If earnings are considered business income, investors should use one of the following two methods to value inventory:

  • value each item in the inventory at its cost when it was acquired or its fair market value at the end of the year, whichever is lower.
  • value the entire inventory at its fair market value at the end of the year.

For transactions where there isn’t an obvious cost basis - investors should use the fair market value of the asset on the day it was acquired as their cost basis. 

With the foundations covered - let’s take a look at examples of the multitude of transactions and the tax implications, starting with dispositions.

Selling crypto for CAD

Selling crypto for Canadian dollars - or any other currency - is one of the most common dispositions of crypto.

There are many ways to sell cryptocurrency - through centralized Canadian crypto exchanges like Newton, CoinSmart or BitBuy, as well as directly from a non-custodial wallet like Ledger using non-custodial peer-to-peer exchanges.

Regardless of the precise method of the disposition, the tax implications remain the same. Selling crypto for Canadian dollars is a Capital Gains Tax event, and a capital gain or loss must generally be recognised (unless earnings are considered business income). 

Take the adjusted cost basis of the asset and subtract it from the sale price to calculate the capital gain or loss.

Let’s take a look at a couple of examples.

Example 1

A client purchased 0.5 BTC on Wealthsimple in July for $20,280.50 (CAD), and paid a 1.5% operation fee, or $304.20, making the adjusted cost basis for the 0.5 BTC $20,584.70.

The client sold 0.5 BTC on Wealthsimple in December for $23,222.35. 

To calculate the capital gain or loss, subtract the adjusted cost basis of the asset from the sale price.

$23,222.35 - $20,280.50 = $2,941.85. The client made a capital gain and will need to pay Income Tax at their regular rate on half of that capital gain. 

Example 2

A client bought 1 ETH for $3,395.15 in January using their hardware wallet, via Ledger Live, and paid a 0.25% transaction fee, or $8.49, making the adjusted cost basis of the asset $3,403.64.

The client sold 1 ETH in May for $2,888.64. To calculate the capital gain or loss, subtract the cost basis of the ETH from the sale price:

$2,888.64 - $3,403.64 = - $515. The client made a capital loss of $515. The client can offset half of this capital loss against any half of any capital gain they’re liable to pay tax on, or carry it forward to future financial years if they have no capital gain to offset the loss against.

Beware superficial losses

Like many other tax offices, the CRA has a wash sale rule, known as the Superficial Loss Rule. The Superficial Loss Rule prevents Canadian investors from claiming any capital losses where an asset has been sold and bought back within a 30 day period. It applies to crypto like it applies to all other capital assets. 

Learn more about crypto and the Superficial Loss Rule.

Swapping crypto for crypto

Some investors are unaware that trading or swapping one crypto asset for another crypto asset is also a disposition and earnings should therefore be reported as a capital gain or business income depending on the nature of the transaction. This includes swapping cryptocurrency coins for stablecoins or swapping cryptocurrency tokens for an NFT (non-fungible token).

The disposition itself is of the asset previously held, not the asset acquired - although investors must still track the fair market value of the acquired asset and any related fees to calculate their adjusted cost basis in the future.

There are a variety of transactions that are viewed as a swap and therefore a disposition including:

  • Trading crypto for stablecoins, on both centralised and decentralised crypto exchanges.
  • Liquidity mining - and potentially any DeFi investment activity where tokens are received in return for capital.
  • Swapping fungible crypto tokens for non-fungible token(s), or NFTs.

Let’s take a look at some examples to explain.

Example 1

A client uses Uniswap - a decentralised exchange - to trade ETH for USDT, a stablecoin on the Ethereum blockchain, pegged at a 1:1 ratio with the US dollar. 

The client previously purchased 1 ETH for $1,260 (CAD). On the day of the transaction, they traded their 1 ETH for 1702  USDT. We know USDT is pegged to the US dollar, so we know the fair market value of 1 ETH at the time of the transaction was $1,702 USD, but we need to convert this into CAD, which is $2,189.

To calculate the capital gain or loss, subtract the asset’s cost basis from the fair market value at the time of the transaction:

$2,189 - $1,260 = $929. The client made a capital gain of $929 and will need to pay Income Tax on half that capital gain.

As for the new USDT assets, we know from our calculations above that at the time of the transaction, the fair market value of 1702 USDT was $2,189. This figure is the cost basis for the new assets. Despite the asset being pegged to the value of USD, all calculations relating to cost basis and fair market value must be in CAD. Should the investor ever sell some of their USDT holdings, but not all of their USDT assets, they may use the average cost basis method to calculate the price of each USDT unit.

Example 2

DeFi tax gets complicated due to the huge array of DeFi protocols available to investors and the different ways in which they work. The CRA hasn’t released any guidance on DeFi investments and the potential tax implications yet, so for the time being, accountants and investors must infer the tax consequences from the current guidance. This means it all comes down to how the specific protocol works as to whether earnings may constitute business income or a capital gain.

This said, in most instances, DeFi protocols utilise liquidity pools. Liquidity pools are a collection of investor funds that allow specific transactions to be made, automated via pieces of code known as smart contracts when certain conditions are met. For example, there is a ETH-USDT liquidity pool on Uniswap. The smart contract allows investors to use this liquidity pool to trade ETH for USDT, and vice versa, but only when they have supplied the capital they’d like to trade. 

Investors may also earn a percentage of the transaction fees relating to a liquidity pool, as well as additional rewards, by adding capital to a given liquidity pool. It is how these earnings are paid out that likely dictates the tax implications, but the most common way these earnings are paid out is via liquidity pool tokens (LP tokens).

For example, a client invests ETH and USDT into a ETH-USDT liquidity pool on Uniswap. The client receives ETH-USDT LP tokens in return for their capital. These LP tokens accrue value, based on the proportion of transaction fees the investor earns from the liquidity pool. When the investor wishes to remove their capital, they trade their ETH-USDT LP tokens back for their ETH and USDT. Most DeFi protocols work in a similar fashion.

From a tax perspective, this is likely going to be seen as disposition - the investor is trading one token for another and therefore their earnings (depending on the scale at which they’re conducting their activities) is likely to be seen as a capital gain. Therefore, the investor needs to calculate their capital gain or loss from the transaction and pay Income Tax on half of any capital gain.

It’s important to note here that although the majority of DeFi protocols utilise LP tokens, some choose instead to pay out new tokens as a reward, and some opt to use both LP tokens and pay out new tokens. When investors are receiving new tokens as a result of investment activities, this is more likely to be viewed as business income and they’d need to pay Income Tax on any earnings.

Example 3

Despite their unique nature, the tax implications of NFTs are the same as for other crypto assets. In most instances, when a client purchases an NFT, they’ll be using crypto to do so and this would likely be viewed as a disposition. 

For example, a client uses SOL to purchase an Aurory NFT on Solanart. The NFT they buy costs 50 SOL. 

The day the client purchased their 50 SOL, 1 SOL was $44 (CAD) meaning 50 SOL would be $2,200.

On the day the client purchased their NFT, the fair market value of 1 SOL was $58, meaning the NFT cost the client $2,900 overall. 

The client needs to calculate their capital gain or loss from the trade of SOL to the NFT.

$2,900 - $2,200 = $700. The client made a capital gain of $700 and must pay Income Tax on half that capital gain.

As for the new NFT asset, the cost basis of the asset is $2,200.

Spending crypto

Spending crypto on goods or services is viewed as a barter transaction by the CRA and therefore a disposition of an asset where a capital gain or loss should be recognised. 

As crypto moves closer towards mainstream adoption, there are many places investors may spend their crypto in Canada and around the world, including crypto debit cards like the Crypto.com crypto card, using a crypto ATM (with hundreds now available in major Canadian cities like Vancouver and Toronto) or using crypto to pay your bills using a service like Bylls.

To calculate any capital gain or loss, taxpayers need to subtract their adjusted cost basis from the fair market value of their crypto on the day they spent it.

Example

A client uses Bitcoin to buy a PS5 on NewEgg. The total price is $699. On the day the client spends their BTC, $699 is equivalent to 0.023 BTC.

The client needs to identify the cost basis for their 0.023 BTC to recognise their capital gain or loss. When the client acquired their BTC, 0.035 BTC was valued at $500.

$699 - $500 = $199. The client made a capital gain of $199 and will need to pay Income Tax on half that capital gain.

When is crypto business income?

With capital gains out the way, let’s move onto when crypto may be considered business income. 

The simplest way to think about when crypto may instead be viewed as income is when an investor is earning new tokens as a result of their investment activities. The key difference from a tax perspective is that crypto would be subject to Income Tax based on the fair market value at the point it was received, as well as potentially subject to further taxation should the investor later make a disposition. 

There are a number of ways investors can earn new tokens or coins, including:

  • Mining crypto as part of a proof of work consensus mechanism - although there are allowances for hobby miners who would not be liable for Income Tax upon receipt. 
  • Staking crypto as part of a proof of stake consensus mechanism, or staking crypto via third parties or DeFi protocols to earn a reward.
  • Liquidity mining and yield farming - if the DeFi protocol works in such a way that new tokens are paid out, instead of, or as well as, LP tokens.
  • Getting paid in cryptocurrency - whether that’s an entire salary, part of a salary or as tips.
  • Loaning crypto to earn interest via centralised exchanges or decentralised lending protocols (if new tokens are received).
  • Creating and selling NFTs in a manner that constitutes business activities.
  • Engaging with earning platforms like play-to-earn games, learn-to-earn programs, ads-to-earn browsers and more - depending on the scale of your earnings.

Let’s take a look at a few examples of Income Tax on crypto.

Example 1

Staking may refer to two different investment activities - staking as part of a PoS consensus mechanism or staking via a third-party or DeFi protocol. The tax treatment all comes down to how the specific transaction works, so let’s look at an example of each.

A client is staking ADA using a Yoroi Wallet as part of the PoS consensus mechanism for the Cardano blockchain. As a reward for validating transactions on the blockchain, the client is rewarded with ADA tokens. As the client is regularly receiving new tokens, this is more likely to be seen as a kind of business income by the CRA and subject to Income Tax upon receipt. To calculate the amount of additional income, take the fair market value of ADA tokens in CAD on the day the client received them.

Another client is staking via the Lido protocol - a non-custodial staking solution for the Ethereum blockchain, which allows investors to stake while maintaining liquidity to make further investments. The client stakes ETH via the Lido protocol and receives stETH tokens (staked ETH tokens) in return. This transaction would be more akin to a disposition as they’re trading one asset for another - and therefore potentially earnings would more likely be viewed as a capital gain. 

Example 2

Yield farming refers to stacking various DeFi protocols on top of one another in order to reap the largest returns. Like with all DeFi protocols, the tax treatment depends on how the protocol works and how the earnings are paid out. 

A good example of this is SushiSwap - a popular decentralised exchange. A client adds capital to a SushiSwap liquidity pool and receives SLP tokens in return. This could be viewed as a disposition and therefore a capital gain or loss must be recognised. The client then stakes their SLP tokens in a SushiSwap farm to earn SUSHI tokens as a reward. The client will receive new SUSHI tokens and these may be viewed as income and therefore subject to Income Tax upon receipt. Finally, the client stakes their earned SUSHI tokens to earn XSUSHI tokens. In this transaction, the client receives XSUSHI tokens that accrue value in exchange for their SUSHI tokens, which again may be viewed as a disposition and therefore a capital gain or loss should be calculated. 

As you can see from the above, the tax consequences on yield farming will all depend on the specific protocol and how earnings are paid out. As well as this, the specific circumstances of the investor matter too - if they’re seen to be acting as a business, many transactions will be viewed as business income instead. 

Capital gain vs. business income

There are a multitude of crypto clients available across Canada for accountants with knowledge and experience in the crypto industry. In particular, Canadian investors may need personalised advice navigating the thin line between capital gains and business income.

The CRA doesn’t make this particularly clear - stating that there is no one clear factor that constitutes whether earnings are a capital gain or business income and that they decide this on a case by case basis. They also state that an individual transaction could be considered business income, while other transactions made by the same investor may constitute capital gains. 

The CRA do have guidance on common signs that a client may have business income:

  • The investor conducts crypto activity for commercial reasons.
  • The investor promotes a product or service.
  • The investor shows that they intend to make a profit.
  • The investor’s crypto activities are regular or repetitive.

With this rather vague advice in mind, it’s no surprise that thousands of crypto investors in Canada turn to a crypto accountant come the tax deadline to help them navigate their tax liability. 

Koinly helps investors, and accountants every step of the way - not only with our cryptocurrency tax calculator tool, but we also have many helpful resources (like this one!). We help investors find accountants with our Canada crypto accountants directory, as well as help educate them on the complexities of crypto tax with our Ultimate Canada Crypto Tax Guide.

How crypto accountants can help investors

From helping clients optimise their taxable position before the end of the financial year (without falling foul of the Superficial Loss rule!) to filing tax returns with the CRA, you can help your clients each step of the way with Koinly.

Koinly lets you track realised and unrealised gains and losses all from one spot, supports the ACB accounting method, and generates CRA compliant tax reports (including Schedule 3) ready for the April 30 tax deadline. 

How to calculate and report clients’ crypto taxes

In general, there’s five steps to calculating and reporting crypto taxes to the CRA:

  1. Calculate the cost basis of each crypto asset, or the fair market value (FMV) of the crypto asset in CAD on the day it was acquired.
  2. Identify each taxable transaction and how those earnings may be viewed by the CRA (business income or capital gain).
  3. Calculate capital gains and losses from each disposition of crypto. Take half of each capital gain and subtract half of any capital losses for the net capital gain or loss.
  4. Identify the fair market value in CAD of any income on the day it was received.
  5. Report these final figures in the annual Income Tax Return.

The forms needed to file crypto taxes will vary slightly depending on each client and their investments and whether they’re filing as an individual or a business. However, in general clients will need: 

  • Income Tax Return T1. All Canadian residents must file an Income Tax Return T1. Report any income from crypto on the T1.
  • Schedule 3. Report capital gains and losses on the Schedule 3.

The best crypto tax tool for Canadian accountants

Koinly is the trusted cryptocurrency tax calculator for Canadian CPAs and accountants. Our crypto tax software has helped thousands of accountants (and their clients!) save hours of manual tax preparation and calculations.

All Koinly users need to do is connect the crypto exchanges, wallets or blockchains they interact with to Koinly, either via API or by uploading a CSV file of their transaction history. Koinly then gets to work calculating everything necessary to file crypto taxes, based on your location. 

Once it’s worked its magic, check your clients’ Koinly account and generate the crypto tax report your client needs. Koinly can produce many CRA compliant tax reports, depending on how your client files (or how you file on their behalf). This includes the Complete Tax Report, Schedule 3 or the TurboTax Report. 

For accountants, Koinly lets you manage multiple clients all from one spot, with a user-friendly platform and amazing support team to help you troubleshoot any issues as you go. Crypto accountants can sign up for a free Koinly account in minutes.

Koinly also helps connect crypto accountants with crypto investors who need help calculating and filing their CRA taxes. Our Canada crypto accountant directory offers accountants an easy way for clients to find them, and it's easy to get listed yourself.

Need help with a specific exchange?

We’ve got tax guides for the most popular Canadian crypto exchanges and wallets:

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