The deadline for tax reporting in Canada is April 30th, so it’s time for crypto investors to get their house in order. The CRA (Canadian Revenue Agency) has fairly straightforward rules when it comes to cryptocurrencies. However, the Superficial Loss Rule which applies to crypto transactions can complicate things for prolific investors. In this article, we’ll take a look at the Superficial Loss Rule and how it applies to crypto taxes in Canada.
What is a Capital Gain and how is it calculated?
According to the CRA, any disposition of cryptocurrency will be subject to Capital Gains Tax. Disposition here means:
- selling or gifting cryptocurrency
- trading or exchanging one cryptocurrency for another
- converting cryptocurrency to fiat currency, such as Canadian dollars
- using cryptocurrency to buy goods or services
So how do you actually calculate the Capital Gains on any of the above transactions?
The Capital Gain is the difference between the selling price of the crypto (or its market value on the date of the transaction) and the adjusted cost base of the crypto.
The adjusted cost base refers to the cost of acquisition of the crypto plus any reasonable expenses incurred to acquire it (including commissions and legal fees). If the acquisition cost is greater than the selling price, then it results in Capital Losses (which can be written off against Capital Gains to reduce the tax liability).
How to calculate capital gain keeping the Superficial Loss Rule in mind
From the point of view of the CRA, there’s one major problem with the current method of calculating Capital Gains for cryptocurrencies.
Say, for instance, it’s almost the end of the tax season, and an investor has made substantial gains in the course of the year. They are holding some crypto which is currently valued at a very low price. It would be easy for them to sell this crypto at the current low rate and then write off the resulting capital losses against their profits, thereby reducing their tax liability.
If they wanted to keep holding on to their crypto assets, they could simply buy it back a few days later, at a price that would likely be similar to the one they sold it at. To prevent this, the CRA has decided to apply the Superficial Loss Rule.
The Superficial Loss rule kicks in when both of these conditions are met:
- The taxpayer (or someone acting on their behalf) acquires cryptocurrency that is identical to the one that they dispose of, either 30 days before or after the disposal, and
- At the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the identical property.
Let's look at how this would apply in a real scenario:
John buys 100 ETH on the 6th of Jan 2019 for a total price of $5000. In November of the same year, he sells them at a loss, for $3000.
To spare you the math here, we will simply enter these transactions into Koinly which will calculate the gains:
So, John made a loss of $2000 (who would have guessed?!)
Now, John thinks he is pretty clever so he decides to buy the ETH back the next day (for the same price) but... you guessed it.
The superficial loss rule zeroes out his loss from the previous day...
Basically what happened is that the $2000 loss that John made on the 3rd got added onto the cost of the coins he bought the next day.
Hopefully, you now have a better idea of the Superficial Loss Rule and how it applies to your tax returns. If you’re looking for more details on crypto taxes in Canada, you can check out our free Crypto Tax Guide for Canada. It not only discusses all the crypto-related tax provisions, but also advises you on how you can plan your taxes better.
If you are planning on filing your taxes then make sure you also try out Koinly which is a crypto tax calculator that fully complies with the CRA's crypto tax guidance. It is also the only tax calculator (as of writing) that handles the Superficial Loss Rule we discussed in this article!