This guide covers bitcoin and cryptocurrency tax laws in Canada. We will go over everything from crypto-to-crypto trades to hard forks and ICOs. We will also look at how you should prepare and file your crypto taxes.
The CRA (Canada Revenue Agency) has a fairly broad yet straightforward definition for cryptocurrency. Cryptocurrency is basically "a digital representation of value that is not legal tender". Let's look at what that means for you as a taxpayer.
Capital gains tax on crypto
The CRA treats cryptocurrency as a commodity from a taxation point of view. If you're not running a crypto business, then any profits from "disposition" of crypto will be considered as Capital Gains for tax purposes. "Disposition" here refers to :
- 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
The difference between the selling price of the crypto and the cost basis constitutes a capital gain. The capital gain gets added to your income and the tax rate then depends on your tax bracket. However, only half of the capital gain is actually subject to tax.
If you are carrying on a business that involves cryptocurrency transactions, you won't be subject to capital gains tax. The profit from the disposition of the cryptocurrency will be treated as business income. If someone sells and purchases crypto as part of their business, even if this is a one-off transaction, the profits will still be considered as ordinary income, not capital gains.
Calculating your capital gains
In order to calculate your capital gains you simply need to deduct the selling price of your crypto from the adjusted cost base. In Canada, adjusted cost base refers to the acquisition cost of a property plus any reasonable expenses to acquire it such as commissions and legal fees. If you are buying crypto inm ultiple transactions then the ACB is the average cost of all coins.
When crypto is held as part of a business
If crypto is held as part of a business, it will be considered as inventory which will then have to be valued at the end of each year. This can be done using any of the two methods:
- Valuing each item at either its acquisition cost or its fair market value at the end of the year, whichever is lower
- Valuing the entire inventory at its fair market value at the end of the year
Again, the term "cost" here refers to the cost of acquiring the particular cryptocurrency together with all the reasonable costs incurred for such acquisition.
Taxes on Buying / Selling / Trading cryptocurrency
Buying cryptocurrency (eg. CAD → BTC)
There are no taxes on buying or hodling cryptocurrencies in Canada, similar to most other countries. However, keeping accurate records of the acquisition cost is very important, because it forms the cost base for capital gains calculations.
Selling cryptocurrency (eg. BTC → CAD)
This is a taxable event. As mentioned, selling crypto for fiat currency is subject to capital gains tax. If your crypto wallet contains different types of cryptocurrencies, each type will be seen as a separate CGT (Capital Gains Tax) asset.
Craig purchases 0.1 Bitcoin in July 2017 for CA$1500 and sells it in November 2017 for CA$ 2500. His total capital gain is CA$ 1000. Half of this (CA$500) would get added to his taxable income and he would be taxed as per his marginal income tax rate.
Trading one cryptocurrency for another (eg. BTC → ETH)
An exchange of crypto aka crypto-to-crypto trade is treated the same way as a sale. Exchanging one cryptocurrency for another is considered as disposal of one CGT asset and acquisition of another. It simply means you are receiving property instead of money upon selling your cryptocurrency. The sales price, in this case, would be the market value of the crypto you receive. If, for some reason, it can't be valued, you will have to consider the market value of the crypto you sold at the time of the transaction.
Let's say Sienna purchased 0.1 Bitcoin for CA$1000 in August 2017. In November 2017, she exchanged 0.05 Bitcoin for 2.1 Ether. On the date of the transaction, the market value of 2.1 ether was CA$1500. This means her capital gains would come to CA$1000 as the cost basis would be CA$500. Once again, 50% of the total gains or CA$500 would be added to her taxable income and she would have to pay tax as per her income tax slab.
Cryptocurrency to Stablecoins (ex. BTC → TUSD or TUSD → BTC)
As far as the Canadian Revenue Agency is concerned, a stable coin is nothing but a cryptocurrency which offers some degree of price stability since it's backed by a reserve asset, usually a fiat currency. This means that for all practical purposes when you sell any type of crypto and buy stablecoin in exchange, it will be seen exactly like a regular crypto-to-crypto exchange (see above for tax implications).
Paying for goods or services with cryptocurrency
Purchasing goods or services with cryptocurrency counts as a barter transaction in the eyes of the Canadian Revenue Agency. This means that it is subject to the same tax treatment as selling crypto. In other words, the market value of the crypto that you have used to pay for a transaction — whether that's an internet bill or a cup of coffee— will be seen as the sales proceeds. You will have to calculate Capital Gains Tax accordingly.
Moving crypto between your own wallets/accounts
Moving crypto between different wallets or accounts is not a taxable event and doesn't trigger capital gains tax. Of course, you have to calculate cost basis of different transactions at the end of the year, which means you need to keep track of all the movements from one wallet to another so that you don't end up paying taxes twice.
Let's say Greg buys 4 LTC for CA$800 on Binance. He later moves the funds into his private LTC wallet. A few days later he transfers the LTC from his private wallet to his Coinbase account and sells it for CA$1500, resulting in capital gains of CA$700.
If Greg has undertaken lots of crypto transactions in the course of the year, he might want to use a crypto tax software such as Koinly to generate his crypto tax report. In this case, he will have to sync all three wallets to make sure he doesn't end up with any double taxation.
If he doesn't sync his private wallet but only syncs the Coinbase and Binance account, Koinly won't be able to identify that the funds he transferred into his Coinbase account are the same funds he purchased on Binance. However, once Greg adds his private wallet address, Koinly can match the transfer by tracing it from Binance to his wallet and then from his wallet to Coinbase. In this case, Koinly will be able to create an accurate tax report and Greg will have to pay tax on just one transaction.
What happens if, for some reason, Greg no longer has access to one of his wallets — say his private wallet. In that case, he will have to manually make changes using Koinly's web interface. He will mark the transfer from Binance as "Ignored" so that the software doesn't realize any gains on it. He will then change the value of the incoming transaction to Coinbase to sync with the cost-basis of the outgoing transaction from Binance. What this means is that even if you plan on using crypto tax software, it's always useful to have some kind of records of your crypto transactions.
Tax on cryptocurrency Margin Trading
Margin trading or trading with futures/CFD contracts using cryptocurrency doesn't really have any particular tax treatment. However, it's useful to think of these transactions as akin to taking a loan from a bank to invest in property. When you make any gains/losses on selling the property, it will be classified as capital gains that needs to be declared.
In margin trades, a sale happens when you close a position. The gains here are declared in the same way as with any other regular trades. Similarly, if you pay any interest on your margin trades, you can claim it as a deduction. Keep in mind that if you pay interest using crypto, that transaction itself will also be subject to capital gains.
Given the volatility of cryptocurrency, there is a chance that the exchange will sell your collateral if the value of your borrowed funds becomes lower than the value of your collateral. This kind of forced sale will also trigger capital gains tax.
Tax on Income from Mining / Staking
Mining refers to a process where you use specialized computers to solve complex mathematical problems which confirm crypto transactions. When a miner successfully creates a valid block they receive a payment which is nothing but the fees from the transactions that are included in the newly validated block. Obviously, the miner gets paid in the cryptocurrency that they are validating. While cryptocurrencies like Bitcoin use this process of mining, others like Ethereum use a process called staking to confirm the transactions on the blockchain. Here again, those involved in the staking process get rewarded with cryptocurrency.
The crypto that you receive from mining/staking will have different tax treatments depending on whether the mining is simply a hobby that you undertake sporadically or a business activity. The Revenue Agency decided this on a case by case basis. However, they believe that if a hobby is being carried out in a "sufficiently commercial and business-like way", it will be considered as a business for tax purposes.
If mining is a hobby
In this case, the crypto you mined will be considered as an asset and you will have to pay Capital Gains Tax (CGT) when you dispose of the crypto. However, the cost basis here would be zero because no money was spent in acquiring the crypto. No deductions are allowable in this scenario.
If you're in the business of mining
If you're in the business of mining, the cryptocurrency you hold is considered as inventory and you need to use one of the two methods to value it:
- Valuing each item at either its acquisition cost or its fair market value at the end of the year, whichever is lower
- Valuing the entire inventory at its fair market value at the end of the year (the price you would have to pay to replace an item or the amount you would receive if you sold an item)
You can use either the cost or the fair market value to value your inventory, whichever is lower. In fact, you can use the lower value for each specific cryptocurrency you have which makes tax planning even better. Here cost refers to "cost at which the taxpayer acquired the property" along with all reasonable costs incurred to buy the property. You also need to be consistent and use the same method to value your property, year-on-year.
It's also important to remember, of course, that the income from selling mined cryptocurrency will become part of your business income and be taxed accordingly. Costs associated with mining (like electricity, equipment etc) would have to be calculated on a per coin basis and then deducted against the sales proceeds.
Tax on Chain splits / Forks
A chain split, or a hard fork takes place when an existing blockchain diverges into two or more competing versions, with different groups of people supporting the original and the forked currency. Here again, the tax treatment depends on whether you hold crypto as an investment or as part of a business:
Holding crypto as an investment
If you are a hobbyist and are holding crypto as an investment, and you receive new cryptocurrency after a chain split, there is no ordinary income or capital gains at the time when you receive the crypto. This is similar to mining.
Of course, you will have to pay capital gains tax when you dispose of the cryptocurrency. It's important to remember that Canadian guidelines are quite clear here — the cost basis for the new crypto you receive after a hard fork is zero. This means that the entire sales proceeds is your capital gain and half of it will get added to your taxable income.
Keith held 5 Bitcoin on August 2017 as an investment. After Bitcoin Cash split from Bitcoin, he held 5 Bitcoin and 5 Bitcoin Cash. At the time of the split, he won't incur any income tax or capital gains tax for that matter.
In August 2018, however, Keith sells the Bitcoin cash for CA$4500. Since the costs basis of the Bitcoin Cash is zero, his total capital gains will come to CA$4500 and half of this amount, that is CA$2250 will be added to his taxable income.
Cryptocurrency held in a business you carry on
If you receive crypto as a result of a chain split in relation to cryptocurrency held in your business, it will be treated as inventory. In this case, you need to account for its value as per the inventory valuation method we discussed earlier. Also, while disposing of this crypto, you will have to add the income to your business income for the year and pay taxes accordingly.
Tax on ICOs / IEOs
ICOs (Initial Coin Offerings) or IEOs (Initial Exchange Offerings) refer to a situation where investors can purchase tokens/coins in a yet-to-be-released cryptocurrency/company. This purchase usually happens by paying for it in existing cryptocurrency likes Bitcoin or Ethereum. So from a taxation perspective, this amounts to a crypto-to-crypto trade. So the taxable event is triggered on the date of the ICO transaction, when you receive the new tokens. When you sell the new tokens at a later date, the cost base of that transaction will be the value of the cryptocurrency that you paid for it on the date of the ICO/IEO.
How Cryptocurrency Loans are Taxed
Lending your cryptocurrency in return for interest
Lending your cryptocurrency and getting interest on the same generates taxable income. This is similar to mining coins and is subject to similar rules. The taxable income will depend on whether crypto lending is a hobby or a business. See the income from mining section for more details.
Borrowing fiat currency against your crypto
As of now, borrowing fiat currency against crypto is not considered taxable income. At the same time, given the volatility of crypto, there's always a chance that your collateral may get liquidated by the loan platform if it falls below a specific value. This liquidation would be a taxable event and trigger capital gains tax.
Foreign Property Regulations
If you're frequently trading in cryptocurrency, you need to remember that most crypto will fall under the category of "foreign property". The CRA has a rule which says that when you hold certain types of foreign property greater than CA$100,000 in value you have to fill out a T1135, which is a Foreign Income Verification Statement. Also keep in mind that the CA$100,000 limit doesn't refer to your property value at the end of the year. If the value of your crypto exceeds CA$100,000 at any point during the year, you still need to fill out the form.
Superficial Loss Rule
The Superficial Loss Rule is a wash-sale rule that prevents people from taking advantages of capital losses, and it applies to cryptocurrencies as well. The rule kicks in when both of the following conditions are met:
- The taxpayer (or someone acting on their behalf) acquires a property 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.
If this rule kicks in, then the taxpayer is not allowed to claim the capital losses triggered by the disposal event. The reason for this is simple and used to be a commonly used tax-planning device for shares and stocks before the Superficial Loss rule came in.
Without this rule, here's what may happen. A taxpayer may realize that the crypto they own at the end of the tax year is currently at a very low value. Of course, they still want to hold on to it in hopes of future capital appreciation. However, they decide to sell the crypto at the end of the year at the low value and use the capital losses triggered by this sale to reduce the capital gains they've made during the year. Then they simply buy the crypto back again after a few days. This means that the entire sale has happened just for the purpose of reducing tax liability. The Superficial Loss Rule prevents taxpayers from setting off capital losses in these kinds of transactions.
GST/HST applied to cryptocurrency
The Goods and Services Tax/Harmonized Sales Tax, as the case may be, will also apply to crypto transactions where a taxable property or service is exchanged for crypto. The GST/HST that applies to this property or service will be calculated based on the fair market value of the cryptocurrency as on the date of exchange.
So businesses that accept payments in cryptocurrency will not be able to avoid GST/HST. The amount of tax will simply be calculated based on the fair market value of the crypto on the transaction date. The onus here is on the businesses who receive the crypto as payment to keep records indicating how they have calculated the fair market value.
Record keeping for your crypto transactions
The CRA is fairly clear on the fact that you have to keep extensive records of your crypto transactions. The CRA also recommends using crypto tax software to aid in seamless recordkeeping. This applies to individuals who own crypto as an investment, crypto businesses, as well as businesses that accept payment in cryptocurrency.
The problem with exchanges is that there is no standard for the records they keep and how long they keep them. This means that the onus is on the taxpayer to periodically export information from these exchanges to make sure they are maintaining meticulous records. You need to keep all the required records along with supporting documents for at least six years from the end of the last tax year that the records relate to.
Here are the different kinds of records you are expected to maintain:
- Transaction date
- Receipts of purchase and transfer of crypto
- The fair market value of the cryptocurrency in CAD at the time of the transaction
- A description of the transaction and the cryptocurrency address of the other party
- The accounting and legal costs
- The exchange records
- Digital wallet records and cryptocurrency addresses
- Software costs related to managing your taxes
Note that you can use Koinly for your record keeping without paying anything. Simple sync your exchange accounts via read-only API keys and your blockchain wallets using your public keys or addresses. Koinly will then sync your transaction history automatically from time to time.
Minimizing Your Tax Liability
Deducting Cryptocurrency Losses & Trading Fees
The first step towards minimizing your tax liability is figuring out what losses and expenses you can offset against your taxable income. This will vary depending on whether you're holding crypto as an investment or as part of a business.
Holding crypto as an investment
If you're not a professional trader and are simply holding some cryptocurrency as an investment, you will have to pay capital gains tax on disposal of the cryptocurrency. This means that if you incur a net capital loss, you can use it to offset the capital gains. Be mindful that the same 50% rule that applies to capital gains will also apply to losses — this means that you will only be able to write off 50% of the losses.
Madeline is a crypto investor, who holds cryptocurrency as part of a balanced investment portfolio. Madeline bought 0.1 BTC for CA$1200 in May 2018 and then sold it after 3 months for CA$800. This means that she incurred a capital loss of CA$400. She can use 50% of this amount, or CA$400, to offset taxable capital gains made during the year.
Crypto trading or cryptocurrency used in business
Since crypto profits are treated as business income, it goes without saying that crypto losses can be deducted from business income as well. Of course, bear in mind that all the crypto you hold at the end of the year has to be declared as inventory. Of course, you can either choose to declare it at cost or fair market value, whichever works better for you.
Deducting Cryptocurrency Mining Expenses
This depends on whether you undertake mining as a business or a hobby.
Mining as a business
Any expenses related to mining — including electricity costs — can be deducted from your income to find your net taxable income. The CRA recommends keeping the following records to claim deductions:
- Receipts for purchase of crypto mining hardware
- Receipts to support your expenses and other costs like power costs, mining pool fees, hardware operation time, hardware specifications, and maintenance costs
- Mining pool details and records
Mining as a hobby
If you've undertaken crypto mining as a hobby, the mined bitcoin constitutes holding a CGT asset and you would be subject to capital gains tax on disposal of the crypto. This means that no deductions are allowable.
Filing your crypto tax reports
Here are all the steps you need to undertake to file your crypto taxes correctly:
- Download transactions from your accounts at different exchanges, as well as private wallets. You need to do this not just for the assessment year but all previous years (the CRA recommends keeping records for upto 6 years from the end of the last tax year). This will help you calculate your cost basis correctly.
- Ensure withdrawals from one account and a deposit into another account are marked as Transfers to avoid paying double tax.
- Remember that crypto to crypto trades are also taxable. Which means you need to assign market rates to all the crypto trades and calculate the sales proceeds and cost basis accordingly.
- Calculate your capital gains using the Adjusted Cost Basis (ACB) method.
- File your crypto taxes online or complete the paper tax return by ordering the income tax package to be delivered to your home.
Since the entire process can take a lot of time and manual effort, it's a good idea to use an automated crypto tax solution like Koinly. With the software, you can automate steps 1 to 4 completely, and all you have to do is just file your returns using the gains that the software has calculated for you.
Cryptocurrency Tax Deadlines
For individual taxpayers, the assessment year is from 1st January to 31st December. So let's say you're paying taxes for the year 2018-19, you need to complete your tax returns by April 30, 2020. This is also the last date for paying any taxes that are still due. If you're self-employed, you have time till 15th June, 2020 to file your returns.
Amending tax reports for previous years
The US, UK, Australia, Sweden and a number of other developed economies have been cracking down on crypto tax evaders. Before Canada starts following suit, it's probably a good idea to make sure you're filing your crypto taxes correctly, and even proactively file an amended tax return if you need to.
How can Koinly help?
Koinly is a cryptocurrency tax calculator that helps you generate accurate and compliant capital gains reports, which means you can file your crypto taxes with a lot more ease. With Koinly all you have to do to file your taxes is:
- Connect your exchange accounts and wallets (via API or CSV files)
- Review your imported data (tag airdrops/forks/mining-income/staking etc)
- Let the software calculate your capital gains
It's actually that easy. Find out more.