The blockchain recognizes no other costs than transaction fees. However, in the real-live crypto arena, this isn’t where your expenses end. Apart from the fee you need to pay to miners for each transaction, cryptocurrency exchanges — as main facilitators of all trading activities — charge trading fees, deposit fees, and withdrawal fees. Finally, all gains you make from trading crypto-assets over the course of a tax year need to be neatly reported to your national revenue agency.
Interestingly, the level of crypto regulative norms greatly differs from one country to another. Yet, almost all legislations with a clearly defined framework treat crypto as a commodity or security, not a legal tender.
Оn a global scale, there is a strong tendency toward cryptocurrency regulation, given the fact that it has become a prolific business field — only in 2021, investors realized gains of nearly $163 billion. For sure, authorities haven’t let these huge amounts go unnoticed, so crypto exchanges are getting labelled as regular money businesses while crypto traders are taxpayers.
Since crypto is still a young industry, calculating taxes can be rather challenging. That’s why we’ve rounded up everything you need to know about Bitcoin taxes, your crypto tax liability in Canada, and the best practices for calculating them in full compliance with CRA (Canada Revenue Agency).
The Status of Cryptocurrency in Canada
Bitcoin and other virtual currencies aren’t considered legal tender in Canada. Yet, it’s completely legal to use crypto as a payment method for goods and services as well as a financial instrument on trading platforms, including derivatives and CFDs. That’s because the CRA treats all digital currencies as commodities, which are then subject to barter transactions and applicable tax events.
At the beginning of 2014, Canada was the first country to formulate laws on crypto by making amendments to the Proceeds of Crime and Terrorist Financing Act (PCA) to include individuals and companies that deal in crypto. This obliged all crypto-related companies to register with the Financial Transactions and Reports Analysis Center of Canada (FINTRAC) as Money Service Businesses (MSBs) and implement compliance programs that keep records of all cryptocurrency transactions. At that point, the role and purpose of crypto assets in society weren’t very clear. Hence, we can readily say that Canada has shown a proactive attitude in regulating cryptocurrencies.
In 2017, the Canadian Securities Administrators (CSA) released an official announcement on the applicable securities laws to crypto-assets, and the next year, the head of Canada’s Central Bank addressed crypto assets as securities. Under this classification, all cryptocurrency transactions are regularly audited under multiple tax rules. The question is how to know which one applies to you.
When Do You Have to Pay Crypto Taxes?
Being classified as a commodity, your crypto activities can be subject either to Capital Gains Tax or Income Tax.
The crucial difference is that if your crypto gains are categorized as taxable income, you’ll have to pay the applicable Income Tax on the entire sum of your crypto transaction, while “capital gainers” will be charged Capital Gains Tax only on half of the profits of that crypto transaction.
The thing is that you as an individual don’t make the classification — it’s the CRA that examines your case individually and decides on what tax you’re subject to. However, based on their guidance, there are clear signals that distinguish a capital gain from dynamic business income.
A Capital Gain Task
According to the CRA guidance, your crypto activity is considered a taxable event after the disposition of your cryptocurrency as a capital asset. This includes the following scenarios:
- Using crypto as a payment method;
- Cashing crypto in exchange for CAD;
- Selling cryptocurrencies;
- Crypto-to-crypto swaps and P2P (peer-to-peer) trades;
- Giving away crypto as a present to family and friends.
It’s of utmost importance to remember that Canada doesn’t feature a unified rate of Capital Gains Tax, nor does it recognize long-term capital gains vs short-term capital gains. In fact, your gains will be taxed at the same rate as the Provincial and Federal Income Tax but only on half of the amount of your capital gain. CRA updates the rates annually, so you need to regularly check the tax plan for the ongoing year.
How to Calculate a Capital Gain Tax?
Whatever listed activity you’ve taken part in, you’ll either have a gain or a loss at the end of the day. We define a capital loss or gain as the price difference between the price for which you bought or otherwise acquired that asset and the sale price or the price for which you’re exchanging, or gifting it.
You shouldn’t have any problems calculating your capital gains tax rate. For starters, you’ll have to find out what we call a cost basis. Fortunately, the Canadian tax system uses the adjusted cost basis method, which enables you to modify your cost basis to present the real expenses. In cryptocurrency terms, this means that you can add the trading and transaction/gas fees you have paid.
An Income Tax
A very “humanized” method to distinguish between a Capital Gain Tax or Income Tax in association with crypto is to ask yourself the following question: Do I earn from crypto or earn crypto?
As discussed in the previous section, gains arising from your crypto activities are subject to Capital Gain Tax or, in other words, you earn from crypto. On the other hand, earning crypto is a type of business-like income, even though you may act as a casual investor from the comfort of your home. This group of “crypto-business” activities includes:
- Accept payments in crypto;
- Crypto mining;
- Staking and Yield rewards;
- Selling or borrowing NFTs;
- Referral bonuses.
As such, a crypto enthusiast can easily find the “tax category” in which they belong. However, things get a bit complicated if you’re a full-time day trader. While the description of your activities fits better with a capital gains taxpayer, CRA may classify you into the Business Income Tax.
How to Calculate an Income Tax?
This is the simple formula through which we calculate the Crypto Income Tax. First, take the fair market value of the cryptocurrency in CAD on the day of the receipt and then apply the respective Provincial and Federal Income Tax rates to the full income amount.
What About DeFi Transactions?
The crypto industry has widely expanded its scope of trading activities since the launch of Bitcoin in 2009. One of the most attractive sub-industries nowadays is DeFi platforms, which offer a truly decentralized approach to trading, vastly different from what we can expect on centralized crypto exchanges (CEXs).
Popular DeFi platforms are represented by AMM protocols whereby users can swap tokens (the majority of AMMs are Ethereum-based programs) without any form of registration or KYC verification and interact with each other directly from their digital wallets.
Apart from token-to-token swaps, these next-gen platforms offer myriad earning opportunities, such as staking, lending, farm yielding, airdrops, gamified competitions with token rewards, etc.
Since CAD, U.S. Dollars, and other fiat currencies aren’t welcome on DeFi platforms, almost all types of profit you could possibly earn there fall under crypto earning and hence, are subject to Income Tax.
What Documents Do I Need for Tax Filing?
Regardless of the tax bracket you fall under, you have to keep neat records of all your transactions to calculate gains and losses for tax audits. Part of the required documentation includes:
- The time of the transaction;
- A description of the transaction;
- The purchase receipt if you bought or sold something in or with crypto;
- Crypto wallets records and list of wallet addresses if you traded crypto in a peer-to-peer manner;
- The crypto exchange records if you use their platform for executing transactions
- All types of costs you had to settle during or after the transactions: exchange costs, blockchain fees, legal and accounting costs, software costs, etc.
- Miners also need to submit the expense for purchasing mining hardware, details, and records for the mining pool, maintenance, and mining pools fees.
Collecting all these documents can be exhausting, especially if you do it manually. Crypto traders usually rely on specialized tax software that helps them file flawless transaction records and provide the necessary tax guides in the process. Before you download/buy the software, double-check whether it’s adjusted to the norms and rates of the Canadian system.
Some of the best Canadian-suited software solutions include Koinly and Wealthsimple Tax, as well as the TurboTax web platform, which delivers e-filing services for your income tax return directly from your laptop or mobile device.
Also, some crypto exchanges have built-in tax calculators and they can help you compute the profits and losses made on their platforms. Ultimately, it might be best to contact a tax professional or a consulting company if your portfolio signals a variety of gains achieved across various markets.
Bottom Line — Can I Avoid Cryptocurrency Taxes?
You shouldn’t try looking for “holes” in the tax system just because crypto trades take place on a pseudonymous and trustless network — law enforcement has established advanced mechanisms for tracking down tax dodgers even if they trade on credential-free ETH-based platforms. However, as you can see, the largest marketplace for trading crypto is regulated centralized exchanges like Coinbase and Bitbuy, which require an obligatory KYC verification to allow you to use their services.
Verification forms contain detailed information about the user-to-be (ID number, address, bank account, etc.), and the CRA, as a FINTRAC registered institution, has access to all your submitted documents upon request. What’s more, as of 2022, all MSBs operating in the territory of Canada must notify the CRA for any transaction larger than $10,000.
Finally, if you’re really determined to stay away from taxes and accountants, confine yourself to crypto-related activities outside the CRA taxable list: purchase crypto and HODl it “indefinitely.” Not to mention that nobody will tax you if you get a generous portion of BTC as a birthday gift.