Canada Crypto Tax Loss Harvesting Guide
Tax loss harvesting lets you reduce your overall tax bill, but there are key dates & CRA rules you need to know. Learn about tax loss harvesting in Canada. 🇨🇦
What is tax loss harvesting?
Tax loss harvesting (or tax loss selling) is a legal tax reduction strategy. It’s when investors sell off capital properties or commodities at a loss, in order to offset that loss against taxable gains.
The CRA is clear that capital losses may be applied against taxable capital gains, but there are a few rules that are helpful to know.
For starters, in the same way that only 50% of any capital gain is taxable, you can only offset 50% of any capital loss.
If you have no gains to offset your loss against, you can carry forward your net capital loss to offset against future gains indefinitely, although there are some limits for specific types of capital losses.
Read next: The Ultimate Canada Crypto Tax Guide
How tax loss harvesting works
Tax loss harvesting is easy to understand with an example.
You bought Bitcoin for $35,000 and Ethereum for $4,000. Since you got your crypto, the price of BTC has gone up to $37,000 and the price of Ethereum has dropped to $2,000.
You want to cash out your crypto while the getting is good - so you sell BTC for $37,000, giving you a $2,000 gain - half of which is taxable.
With tax loss harvesting, you could sell your ETH for $4,000 and create a $2,000 loss - half of which you can offset - meaning you’d pay no tax at all.
If you’re now wondering why you wouldn’t just buy back the asset you realized a loss on - there’s a good reason. The CRA has specific rules to stop Canadian investors from doing this.
CRA & superficial losses
A superficial loss is a loss created for a tax benefit, also known as a wash sale or paper loss. If you have a superficial loss, you cannot deduct it from your taxable gains.
Under the CRA guidance, a superficial loss occurs when the following conditions are met:
You, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called "substituted property") during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale
You, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale
Examples of affiliated persons include your spouse or common-law partner or a corporation owned by you or your partner.
Without the tax jargon, it means investors cannot sell and repurchase an asset at a loss within a 60-day period and use that capital loss to reduce taxable gains.
Read next: What is the superficial loss rule in Canada?
What are the important tax loss harvesting dates?
You need to optimize your tax position ahead of the end of the financial year. In Canada, the financial year is the same as the calendar year. That means you need to make any moves to reduce your taxable gains before December 31 each year. Any transactions after this date will count towards the next financial year.
You then have until April 30 each year to file.
Read next: 8 Ways to Pay Less Crypto Tax in Canada
How to tax loss harvest crypto with Koinly
Not sure where to start with tax loss harvesting crypto? A portfolio tracker like Koinly can help. Here’s how it works.
To get started, you need to know your overall tax liability for the year. Koinly can help you track your realized gains and losses, as well as your unrealized gains and losses throughout the year. Just connect your wallets and exchanges, and Koinly will calculate everything for you. You can see all of this in your tax summary.
Please note that Canadian users will need a paid Koinly plan in order to view a preview of their taxable gains in their summary. As well as this, Koinly calculates your total gains and losses, as opposed to the 50% of gains that are taxable or 50% of losses that may be offset, as this is what you need to report to the CRA.
In our example, you can see we have a gain of $1,609.45 for the year - we need to report the entire figure to the CRA and we’ll pay tax on half of it (provided we're viewed as an investor with capital gains), but we don’t want to. So now we can go over to our portfolio to check out the performance of our holdings and identify any tax loss harvesting opportunities.
We can see that our AXS tokens are significantly underperforming - so there’s our tax loss harvesting opportunity. If we expand the asset, we can see how much of a loss we’ll make if we dispose of them.
So we’ll sell our AXS tokens ahead of the end of the financial year in order to realize our loss. You can see the transaction, and the $1,820.98 loss generated, in Koinly.
Now when we go back to our tax summary, we’ll be able to see that our gain has been reduced, to an overall $211.53 loss, meaning we’ll have no tax to pay, and we can either sell more assets and realize more gains, or carry that loss forward.
When the time comes to file, all we need to do is upgrade to a paid Koinly plan and download our crypto tax report and use it to report our crypto to the CRA online or hand the report over to an accountant.
More questions on tax loss harvesting? We got you covered.
What are the benefits of tax loss harvesting?
The obvious benefit of tax loss harvesting is reducing your tax bill, but it can also be a great way to weed out bad investments and reinvest into more profitable assets.
What are the risks of tax loss harvesting?
The biggest risk of tax loss harvesting is selling off assets too soon and missing out on gains in the future. Nobody has a crystal ball, so while an asset may be performing badly currently, it doesn’t mean it will do in the future. As well as this, investors need to beware of superficial losses as they will not be able to reap the tax benefits.
Is tax loss harvesting legal in Canada?
Yes. Tax loss harvesting is a legal tax reduction strategy, but you need to make sure you don’t break the superficial loss rules.
Can I offset my capital losses against ordinary income?
No. The CRA is clear that capital losses may only be offset against total taxable gains, but you can carry losses forward if you have no gains to offset.