If you’ve had a successful year for crypto investments and you’ve got realized gains - the Canada Revenue Agency wants to know about it to take their cut of the profits. Crypto in Canada is subject to Income Tax or Capital Gains Tax - depending on the specific transaction. While there’s no way to legally cash out your crypto without paying taxes, there’s quite a few ways you can reduce your crypto tax bill. Here’s 8 ways to avoid crypto tax in Canada in 2022.
Offset losses against gains
Chances are that not every investment you made was a winner - so you’ve probably got some capital losses. You can offset capital losses against capital gains in Canada to reduce your overall tax bill. So for example, say you made a $500 gain from selling ETH and a $500 loss from selling BTC, these would basically cancel each other out.
In the same way that you only pay tax on half your capital gain in Canada, you can only offset half your loss. So in the example above, you’d only be paying tax on a capital gain of $250, but you could offset it with a loss of $250.
If you’ve got more losses than gains, you can carry losses forward to future tax years - these can be carried forward indefinitely, until the losses are fully used up. You can also carry losses backwards, up to a maximum of three preceding tax years, to offset any gains and obtain a tax refund.
Harvest your losses
You only ‘realize’ a capital loss when you sell, trade, spend or gift your crypto. But before that point, if the price of your crypto has decreased since you bought it, you’ll have an unrealized loss.
You can use a crypto portfolio tracker to track these unrealized losses to harvest and offset against your gains. If you know you’re facing a large tax bill and you’ve got some duds in your portfolio - it’s often more beneficial to cut your losses and harvest them.
You can even buy these assets back at a later date - just make sure you leave it more than 30 days to avoid Canada’s superficial loss rule.
Invest in a Retirement Savings Plan
HODLing for the moon? Plan for the future with a Registered Retirement Savings Plan (RRSP).
Any time you make a contribution to an RRSP, you can claim a tax deduction for that contribution, letting you reduce your tax bill. WHen you then want to withdraw funds, you'll pay tax - but by retirement you should be in a much lower tax bracket.
There is a limit as to how much you can contribute each year - either 18% of the previous year's income or the prescribed maximum of $29,210 for the 2022 tax year.
Get a Bitcoin ETF
An exchange traded fund (ETF) is a kind of investment vehicle that tracks the performance and price of a kind of financial asset - in this instance Bitcoin.
You don't own Bitcoin in an ETF. Instead, you're essentially speculating on the price and subsequent gains (and losses). They're appealing to investors who'd like to invest in Bitcoin long-term without the hassle of actually storing and HODLing Bitcoin securely.
There are many Bitcoin ETFs available on the Toronto Stock Exchange including:
- Purpose Bitcoin ETF (BTCC)
- Evolve Bitcoin ETF (EBIT)
- CI Galaxy Bitcoin ETF (BTCX)
While Bitcoin ETFs are a great idea for some - some ETFs carry high management fees, so beware!
Donate crypto to charity
Donating crypto can come with some tax benefits, but the rules get complicated due to the deemed fair market value rule.
This is because crypto is considered a commodity by the CRA and not cash - donation of crypto don't follow the same rules as cash donations. So when you donate crypto, the CRA views this as a disposition of an asset and it has tax consequences. If your crypto has increased in value from acquisition to the time you donate, you'll be liable for Capital Gains Tax on that donation.
Donating crypto to a registered charity is considered a Gift in Kind donation. This means it's subject to the deemed fair market value rule. So upon donation, you'll need to tell the charity when you acquired your crypto asset. If you received and donated it within three years of the acquisition date, the charity may only issue a tax receipt for the obtained value which would be the amount that is potentially tax deductible.
So let's say you buy 1 ETH in December 2020 for $600. You then donate this ETH to a registered charity in December 2021 when the fair market value of ETH is $4,000. According to the CRA, the charity you donate to can only issue a $600 receipt for your donation and your donation is a disposition. You'll need to pay Capital Gains Tax on the difference in value, so $3,600. If the charity issued a receipt for the for the current value of $4,000, this could be invalidated during an audit.
Be seen as an individual investor
The CRA makes it clear that crypto is subject to either Income Tax or Capital Gains Tax - depending on whether you’re seen to be conducting business-like activities or acting as an individual investor. They decide this on a case by case basis, but state the following are signs you may be conducting business-like activities:
- You invest for commercial purposes.
- You undertake investment activities in a business-like manner.
- You promote a product or service.
- You show that you intend to make a profit.
If you’re seen to be acting as an individual investor, you’ll only pay Capital Gains Tax on half of any profits. But if you’re seen to be acting as a business, you’ll pay Income Tax on your entire profits.
Easiest way to avoid any tax on your crypto? HODL.
Provided you don’t sell, trade, spend or gift your asset - you’ll pay no tax on it. So the easiest way to swerve the tax bill is to wait for the moon.
Use a crypto tax calculator
Tracking your cost basis across multiple exchanges and wallets, as well as your subsequent capital gains and losses, as well as any crypto income is time-consuming at best. You can do all this manually with a hefty spreadsheet, or you can use crypto tax software to make sure you don’t overpay (or underpay!) tax on your crypto.
Koinly works with hundreds of crypto exchanges, wallets and blockchains. All you need to do is get your crypto transaction data from each using either API or by importing a CSV file of your transactions. Once you’ve done this, you’ll be able to view all your crypto transactions from one platform.
Koinly will identify your cost basis for each transaction, identify any taxable transactions, calculate your subsequent capital gains and losses, as well as any crypto income, expenses and more. You can find all this in your tax summary.
You can also download a tax report, with all the information you need to file your annual tax return for the CRA. For Canadian users, we offer the Complete Tax Report and the Schedule 3 form, as well as TurboTax reports.