8 Ways to Pay Less Crypto Tax in Canada 2024
Whether you had a successful year and want to pay less tax or you want to make the most of a bear market and your losses - optimizing your tax position can save you money, and a lot of it, if you do it properly. While there’s no way to legally cash out your crypto without paying taxes, there are quite a few ways you can pay less tax legally without getting on the wrong side of the Canada Revenue Agency.
How to cash out crypto without paying taxes in Canada
Want to know how to cash out crypto without paying taxes? It's the million-dollar question... but you won't like the answer. There is no legal way to cash out crypto without paying taxes in Canada -whenever you sell, trade, spend, or even gift crypto, if you have a gain, you have a tax liability. And we definitely don't recommend you try to cash out and ignore your tax bill either. The CRA does not look kindly on those who avoid or evade taxes and the agency is working with centralized Canadian crypto exchanges to collect and share data to ensure tax compliance.
It's not all bad news though - there are many legal strategies to help you pay less tax in Canada. Let's take a look at 8 ways to pay less crypto tax in Canada in 2024.
A quick note before we dive in - while we're looking at crypto taxes specifically, the majority of these strategies may actually help you pay less tax in Canada in general!
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 minimize your 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 backward, 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. 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 use a crypto portfolio tracker (like Koinly) to track these unrealized losses throughout the financial year and later harvest and offset against your gains ahead of the end of the financial year to minimize your taxes.
You can even buy these assets back at a later date - just make sure you leave it for 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.
However, there is a limit as to how much you can contribute each 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 - donations 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 current value of $4,000, this could be invalidated during an audit.
Be seen as an individual investor
Sounds really obvious - but there's a huge difference in the way investors with capital gains vs. business income is taxed.
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. Although there are no clear rules on how to avoid this as the CRA decides on a case-by-case basis - avoiding regular, repetitive investment activities with short-term gains is a good place to start.
The easiest way to not pay 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.
How to pay less tax in Canada with Koinly
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, and 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.