A Comprehensive Guide to Crypto Tax in Canada

In 2009, the first decentralized cryptocurrency, bitcoin, was created as open-source software. A little over a decade later, the cryptocurrency economy has exploded onto the world stage, with a value of more than $3 trillion at the time of writing this article.

Cryptocurrencies generally do not exist within the purview of a central bank, central authority, or government, the way most traditional forms of currency do. They are considered digital assets that can also be used as a medium of exchange for goods and services between parties who agree to use them.

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Tax Considerations for Canada Crypto Tax

For the purposes of taxation, the Canada Revenue Agency (CRA) has chosen to treat cryptocurrency as capital property under the Income Tax Act. This has several tax implications for cryptocurrency traders. The biggest takeaway is that any gains from a transaction of cryptocurrency can be treated as either business income or capital gain depending on the circumstances. When you earn cryptocurrency and later sell it, you may need to pay tax on the income portion.

While most casual traders of cryptocurrency might expect to pay only capital gains tax on their earnings from the sale of cryptocurrencies, several factors can lead to revenue earned from trading cryptocurrency being considered business income. The criteria include the nature of the property sold, the length of ownership, the frequency of transactions, work expended on or in connection with the property, the circumstances leading to the sale, and the motive behind the sale.

Foreign-Held Cryptocurrency

Owners of foreign-held cryptocurrencies should remember that Canadian residents are required to file Form T1135 if the cost of their foreign property exceeds $100,000 at any time during the year. This means holding cryptocurrency situated outside of Canada that is not being used exclusively for an active business would be considered ‘specified foreign property’ and must be reported.

New Developments in Crypto Tax in Canada

The CRA has shown increased interest in pursuing buyers and sellers of cryptocurrency it sees as evading taxation. For instance, in the case of Minister of National Revenue v Coinsquare Ltd., the Federal Court of Canada issued an order allowing the CRA to compel Coinsquare to produce information about anonymous individuals using the platform.

Detailed Tax Laws & Tax Rules

Crypto Capital Gains Tax

When you sell, trade, or dispose of cryptocurrency, you incur a capital gain or loss. The CRA treats half of the capital gains as taxable income. For example, if you bought Bitcoin for $1,000 and sold it for $2,000, your capital gain is $1,000, and $500 of that would be subject to capital gains tax. To file crypto taxes in Canada, you must report these transactions on your income tax return.

Income Tax on Business Activities

If your crypto activities resemble business operations—such as frequent trading, mining, or providing services for cryptocurrency—the CRA may classify the gains as business income. This income is fully taxable at your federal and provincial income tax rates. Thus, crypto transactions are subject to income tax if they are considered business activities.

Crypto to Crypto Transactions

Exchanging one cryptocurrency for another is considered a taxable event. The CRA views this as a disposition where you must report the fair market value of the disposed cryptocurrency in CAD on the day of the transaction. Such cryptocurrency transactions must be meticulously documented for tax purposes.

Crypto Mining and Staking

Mining rewards and staking income can be complex. If mining or staking is done as a business, the income is taxed as business income. If it’s considered a hobby, it might not be taxable until the crypto is sold or disposed of.

DeFi and Play-to-Earn Activities

Earnings from DeFi platforms or play-to-earn games are often considered business income, subject to ordinary income tax rates.

Record Keeping

The CRA requires meticulous record-keeping for all crypto transactions. This includes the date, value, and purpose of each transaction. Records should be kept for at least six years, as the CRA can request to see them at any time.

Reporting Requirements

• Form T1135: For foreign-held cryptocurrency exceeding $100,000 in value.
• Schedule 3: For reporting capital gains and losses.
• Form T2125: For business income from cryptocurrency activities.

Future Regulations for Crypto Tax Rates in Canada

Canada is set to adopt the International Crypto-Asset Reporting Framework (CARF) by 2026, which will impose new reporting requirements on crypto-asset service providers and enhance transparency to prevent tax evasion. This means that including cryptocurrency in your federal tax filings will become even more detailed and stringent.

Get Professional Advice

Given the evolving nature of cryptocurrency taxation and the complexities involved, it is advisable to consult with a professional expert in litigation services to ensure compliance and optimize tax liabilities. Professional advice is particularly crucial for navigating business income classification, foreign property reporting, and leveraging capital losses effectively.

By understanding and adhering to these guidelines, Canadian crypto investors can manage their tax obligations more effectively and avoid potential legal complications. Contact us today for more information and advice on handling your crypto gains and tax obligations in Canada.

DISCLAIMER: Please note this article is not legal advice. Always consult a lawyer for legal advice regarding your particular situation. The article is not necessarily a complete and accurate picture of the law – it is an article of a general nature.

Published on December 2, 2021