Even though cryptocurrencies have been around for more than a decade, it’s still a fairly new technology.
As a result, it’s taken until the past few years for governments to implement regulations and tax requirements.
For example, investors will see their crypto capital gains in Canada subject to taxation.
We’ve done the legwork to determine just how Canadian taxes and your cryptocurrency work.
While there are instances when your crypto capital gains are taxed in Canada, there’s also the possibility that your crypto profits could be taxed as income. Our guide will tell you the difference between the two.
But before we get too deep into capital gains, profits, and income, let’s cover some of the basics.
How Does the CRA Categorize Crypto?
According to the CRA, crypto is a “digital representation of value that is not legal tender.” These digital assets are used by traders and investors as a medium of exchange.
They are often used to purchase goods and services for those who accept them as tender. Cryptocurrencies typically operate independently of a centralized government or financial institution.
For tax purposes, the CRA treats digital currencies similar to commodities. Profits from transactions are regarded as either income or capital gains, depending on the situation.
However, along those same lines, losses are treated as capital losses or income losses. It’s up to the taxpayer to determine whether transactions should be taxed as capital gains/losses or income gains/losses.
For example, if you use your crypto to procure goods or services, then the CRA expects the transaction to be treated as income tax.
The challenge here is determining the value of the cryptocurrency used for the transaction. For the most part, the CRA will allow taxpayers to use the “reasonable method.”
The reasonable method expects that the market value of the crypto is the highest dollar amount a reasonable buyer or seller would use.
Just keep in mind that this amount won’t be the same for all cryptocurrencies. Each crypto will have its own separate value, so keep that in mind as you do your taxes.
Crypto Capital Gain or Income?
So, then, how do you determine if your crypto profits are capital gains or income? Don’t worry, we’re going to help you answer that question.
For starters, here are things the CRA will look for to determine if your crypto behavior constitutes a business:
- You have a business plan, acquire inventory, or purchase assets
- You show that your intention is to make a profit
- Your business promotes a product or service
- You interact with commercial entities or behave as other commercial entities behave
For the most part, business transactions typically involve repetitive processes. However, every situation should be considered separate. One transaction that looks like business income may actually be considered capital gains.
Additionally, it’s important to take into account the date the business was formed. If you’re still setting up your business and haven’t launched yet, transactions are not typically considered business income. However, you cannot deduct any losses before your business officially begins.
Companies that are taxed as crypto businesses include but are not limited to:
- Businesses that focus on mining cryptocurrencies
- Companies that primarily trade cryptocurrencies for profit
- Exchanges and platforms that oversee cryptocurrency trading
If you’re having a tough time determining whether your transactions are crypto capital gains in Canada or business income, the CRA has information available to help you. When in doubt, you can also give the CRA a call and ask for a ruling.
Keep in mind, however, that cryptocurrencies are not securities in Canada, based on the Income Tax Act.
Trading one crypto for another
When trading one cryptocurrency for a different cryptocurrency, the rules of barter transactions apply.
However, if you convert your crypto into fiat currency (CAD), then the transaction has to be reported on your taxes as income. You can claim the transaction as either business income or loss or a capital gain or loss.
Mining Crypto
Most investors and traders acquire their crypto through an exchange or trading platform.
However, there is another way to earn crypto: through mining. Mining requires the use of a specific computer, or rig, that is designed to solve complex algorithms. Solving these problems is how cryptocurrency transactions are validated on the blockchain.
Upon successfully validating a block, a miner receives a payment from the network representing transaction fees and rewards for the block itself. Those who mine receive payment in the form of the crypto they are validating.
However, determining how to pay taxes on mining isn’t as simple and straightforward as it might seem.
Taxes on mining cryptocurrency is determined on a case-by-case basis. For example, if it’s a hobby, then mining is being done for enjoyment and not for business reasons. That means only the profits are taxed as capital gains.
On the other hand, if the hobby behaves in the same manner as a commercial business, the CRA may consider transactions business activities, which means any profits are subject to business income taxes.
Determining the value of your crypto
It’s time to file your tax return and you know which crypto transactions are considered business income and which are capital gains. But how do you determine the value of your cryptocurrencies?
This largely depends on what your cryptocurrencies are viewed as inventory or capital property.
If your crypto is considered capital property, you have to track and record your crypto based on the adjusted cost base.
You can find out more about it on the CRA website here. Using the adjusted cost base allows you to report your capital gains accurately.
However, if your crypto is considered inventory, there are a few methods you can use to determine the value of your digital assets.
The first option is to value your crypto-based on its cost when you acquired it, or its fair market value at the end of the calendar year. With this option, you can select the lower price.
The second option is to value all of your cryptos using its fair market value at the close of the calendar year.
It’s up to you which option you select. Using fair market value is easier and doesn’t require as much tracking, but using the first option might save you money in the long run.
Tracking Your Crypto
It doesn’t matter if you’re mining, buying, selling, or trading cryptocurrency, you want to be sure you’re keeping accurate detailed records of all your transactions.
Additionally, if you’re a business that accepts crypto as a form of payment, you’ll want these records if you happen to get audited.
The biggest reason to keep track of your transactions is due to the fact that crypto platforms and exchanges don’t adhere to the same standards when it comes to record-keeping.
Some may keep transactions longer than others. As a result, the best thing you can do is export your information on a regular basis.
Keep in mind that you’ll need the following types of records and information for your cryptocurrency transactions:
- The date the transaction occurred
- The value of your crypto at the time the transaction occurred (in CAD)
- The addresses of the digital wallets used
- The receipts of any goods or services purchased
- Legal and accounting costs associated with the transaction
- A detailed description of the transaction
If you own a crypto mining company or you mine crypto as a hobby, you may also want to have the following information on hand:
- Receipts of costs associated with your mining operation, including electricity, pool fees, hardware costs, maintenance fees, etc.
- Details of mining pools
There are a variety of software types available that will help you track your crypto transactions so you have the records you need to make filing your taxes easy.
The CRA makes it clear that it does not recommend any particular tracking software, so select the option that makes the most sense for your or your business.
Conclusion
Now you know more about how to identify, report, and manage your crypto capital gains in Canada.
While filing your crypto taxes can be a headache if you don’t take the proper steps in advance, with the right tracking software and know-how, you’ll have them done in no time at all.
