Crypto trading can be anything from a fun hobby to a serious investment. But casual and power users alike must submit to one common chore: taxes. Trading cryptocurrencies in Canada comes with a host of different rules and regulations, and each crypto trader must heed the law laid down by the Canada Revenue Agency. Handily, we’ve prepared this short guide to gear you up for tax season
In Canada, cryptocurrencies aren’t treated as legal tender; they’re treated as a commodity. Like most investments, you might be liable for two types of taxes: income and capital gains. Income is money that’s earned while capital gains or losses are calculated by how much you’ve made or lost on your crypto holdings when you sell them.
Capital gains on crypto: an explanation
The most common type of crypto tax is the capital gains tax. There are lots of different ways of calculating this but the most common way is to find the price of your cryptocurrency at the time you bought it and compare the price at which you sold. If you sell it for more than you bought it, you’ll be liable for a capital gains tax. If it’s lower, you can write it off as a capital loss.
To calculate that tax, you’ll have to find a reliable source for the price of the cryptocurrency. If you placed your trades on a cryptocurrency exchange, like Binance or Coinbase, it’s likely that the exchange from which you bought the cryptocurrency will have this information. You can usually download batches of your transactions to calculate the price of multiple sales. For tax purposes, prices must be denominated in Canadian dollars.
If you didn’t buy it on an exchange but from, say, a friend, you can find the price of the cryptocurrency on a price aggregator site like CoinMarketCap or CoinGecko, or from a price index like the CoinDesk Bitcoin Price Index These sites draw price data from several exchanges to calculate the average price of the cryptocurrency at any given moment.
That method might not be possible if it’s an obscure, tiny coin that isn’t listed on an exchange or on price aggregators. In that case, you’ll have to work it out yourself.
There are no hard and fast rules. “Generally, the CRA’s position,” advises the CRA, “is that the fair market value is the highest price, expressed in dollars that a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other, would agree to in an open and unrestricted market.”
The CRA advises, “Whichever method you choose, use it consistently.” That means using the same broker or price aggregator, or grabbing prices from the same time every day.
As a quick example, suppose you buy one Ethereum for $2,000 and, a few months later, just as the market’s about to peak, you time things right and manage to sell it for $4,000 in cash. You’ll then consider capital gains taxes on $2,000 profit. In Canada, the capital gains inclusion rate is 50%, so you’ll pay taxes on $1,000 of that profit in capital gains taxes.
As another example, suppose you sell that Ethereum for $4,000 in Bitcoin, and then use that $4,000 of Bitcoin to buy a new car. By the time you buy your new car, however, Bitcoin has collapsed and you sell your holdings for $2,000 in cash. You’d then be liable for a capital gains tax of $1,000 ($2,000 x 0.5), then a capital loss tax of $1,000 (-$2,000 x 0.5), putting you right back where you started.
When it comes time to file your capital gains taxes, you’ll have to look for the Schedule 3 tax form for capital gains or losses.
Why things change if you’re running a business
Things change if you’re a business. You might have to report that capital gains tax as income instead.
The CRA judges whether you’re running a business on a case-by-case basis. It considers the following as signs that you’re operating a business: your trades are “for commercial reasons and in a commercially viable way,” you’re acting in a businesslike manner—for instance, you’ve got a business plan—you’re promoting a service, or you show that you hope to make a profit from your crypto trading. Examples of cryptocurrency businesses are those in the business of mining, trading, or exchanging crypto.
If you’re disposing of crypto as part of your business, that’s income, not capital gains. But if your crypto gains and losses aren’t part of your business, you’ll pay capital gains taxes.
Crypto income: an explanation
Depending on how you acquired your Bitcoin, you might have to report it as earned income—even if you’re not running a business. Say you want to sell some cinema tickets for Bitcoin. The CRA would treat this as a “barter transaction” and count that Bitcoin as income. A barter transaction is an exchange that doesn’t use legal currencies.
Bitcoin you’ve earned from mining constitutes income. To mine crypto, you have to run specialised software on your computer and set it to crack complicated math puzzles; for solving them, you’ll earn Bitcoin. You don’t buy this Bitcoin from someone else; the Bitcoin blockchain itself created the currency for you as a reward.
Your tax obligations change if you’re mining crypto as part of a business. If you start taking your hobby seriously, it could easily turn into a business. The CRA says: “If a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.”
Then there’s yield farming—the practice of locking up your cryptocurrency in a smart contract and earning yields. These yields can be quite lucrative. It’s analogous to interest on a savings account, but instead of a bank lending out your funds or investing it as it likes, a decentralized and automated protocol does the work for you.
The CRA’s tax guidance doesn’t cover these newer forms of crypto income, but tax lawyers say that the existing laws can be applied to these types of earnings. Determining what kind of tax you have to pay depends on how you use that crypto.
If the person earning that yield plans to flip the tokens they earn as soon as they receive them, they could feasibly attempt to justify that to the CRA as a capital gain. However, if they simply accrue the tokens in the form of interest and plan to hold onto them, that person could plausibly treat those earnings as income. Again, if they’re running a business, they might be able to claim this as business income.
For more complicated procedures like yield farming, it is advisable to speak with a professional tax advisor, and, if possible, one well-versed in cryptocurrencies.
How to collect data for your taxes
The CRA advises that you maintain records on your crypto transactions. One of the handy things about the blockchain is that all this information is recorded on the blockchain: a public, immutable ledger of all the transactions ever conducted and a comprehensive database of who owns what.
However, not everything in the cryptoverse is online. If you’re mining crypto, keep your receipts of mining hardware or cloud pool rentals.
As mentioned, cryptocurrency exchanges often have handy features to help you download your data. And to help users keep up with the demand, cryptocurrency tax companies have sprouted up to automatically process transactions. TokenTax, CoinTracker, and TaxBit are some of the more popular ones.
Such tax software often integrates with the APIs of crypto exchanges and wallets to help you calculate your taxes. Some of them also integrate with decentralized finance protocols to help you work out whether you’re liable to pay capital gains taxes or income taxes on your yield farming, plus calculate the byzantine trades some of the lending or liquidity protocols process on your behalf.
However, although these tools can help you save on accountancy fees for repetitive administrative tasks, they are not advanced enough to robustly replace the advice of professional accountants when it comes to working out your tax liabilities for complicated trades. Lots of these software packages have in-house accountants but they also let you export your data so that your local accountant can take a look.
Final Word: Definitely file your taxes
It should be noted that almost all accountants will advise that you should, well, file your taxes. One of the novel features of blockchains is that they are pseudonymous; all of the transactions ever processed are listed on a ledger but the real names of the owners of those wallets are (almost) never revealed. This might imply that you can get away with not filing your taxes. However, tax agencies worldwide are working on cracking down on tax evasion, and leading agencies, including the CRA, share tips on how to find tax dodgers.
Adding to that, several exchanges have provided customer information to tax authorities, and anti-money laundering laws require most exchanges to extract the personal details of their customers. And even if you never use an exchange, complicated blockchain investigation firms can use advanced analytics tools to pinpoint the owners of pseudonymous wallets.
Since all the data is permanently on the blockchain: you can’t cook the books, let alone burn them, it would be unwise to imagine that your tax liabilities might never catch up with you.
