Yes, you do need to pay tax on crypto in Canada. 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 using tax loss harvesting in their tax reduction strategies.
In this article, we’ll take a look at the Superficial Loss Rule, how it applies to crypto taxes in Canada and how to calculate crypto tax.
What is a capital gain in Canada?
According to the CRA, any disposition of cryptocurrency will be subject to Capital Gains Tax. Here a disposition, or a taxable event, means:
- selling crypto for fiat currency, like Canadian dollars.
- trading or exchanging one cryptocurrency for another.
- using cryptocurrency to buy goods or services.
- gifting crypto.
How do you calculate capital gains in Canada?
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.
In Canada, the adjusted cost base refers to the cost of acquisition of the crypto plus any reasonable expenses incurred to acquire it (for example, gas fees, exchange trading fees, 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).
The Superficial Loss Rule and what it means for your crypto taxes
From the point of view of the Canada Revenue Agency, there’s one major problem with the current method of calculating capital gains for cryptocurrencies.
Say for instance, it’s close to the end of the tax year, and the investor has so far made substantial capital gains on their crypto, which tax will be due on. However they are also holding an asset which has lost value. They want to keep holding this asset (because they believe it will appreciate in the long run), but they also want to take advantage of the loss made so far to reduce their capital gains taxes.
So they decide to sell the asset - this is a taxable event which triggers a capital loss which can be allocated against their capital gains for the year, reducing their overall taxes. But because they want to continue holding the asset, they buy it back the next day for the same price they sold it for. To prevent this manipulation of the tax rules, the CRA applies 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 $5,000. In November of the same year, he sells them at a loss, for $3,000.
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 $2,000 (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 has happened is that the $2000 loss John made on the 3rd of November was added to his cost basis for the coins he repurchased the following day. This effectively nullifies any tax advantage that John thought was possible by selling at a loss before quickly rebuying.
In order to avoid the application of the superficial loss rule, John would have to wait 30 days following the sale on the 3rd November before rebuying his ETH.
How Koinly Can Help Calculate Canada Crypto Taxes
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. Koinly calculates all your crypto taxes for you using the adjusted cost basis method and taking into consideration the superficial loss rule.
Once you've synced all the crypto wallets, exchanges or blockchains you use with Koinly, all you need to do is head to the tax reports page where you'll find a simple summary of your crypto taxes - and tax reports to download and submit to your tax authority. For Canadian investors, this would be the Schedule 3 Form to submit to the CRA.