If you own a lot of ETH, you might be wondering how Ethereum tax in Canada works. Cryptocurrencies have exploded onto the scene over the past few years which has led to more and more people investing in these digital assets.
However, if you do decide to invest in Ethereum, you’ll have to pay your share of the taxes.
Canada taxes Ethereum and other cryptocurrencies as commodities. No matter how much you make on your digital assets or how well you might try to hide them, the CRA (Canada Revenue Agency) requires that you pay 50% on any capital gains. There are a few ways you can offset those earnings though.
We’ll get to that in a bit. First, let’s take a look a how Canada taxes cryptocurrencies like Ethereum and what you can do to ensure you’re paying what you should.
If you’re invested in Ethereum in Canada, you’ll pay taxes on it like you would a commodity. Half of your gains are taxed and treated as income for that tax year.
So, for example, if you purchased $1,000 worth of Ethereum and then sold it for $5,000 later that year, you’d need to report half of your gain to the CRA. In this case, it’s 50% of $4,000 or $2,000.
You’ll have to report this additional income on your return so you can pay the appropriate taxes. Keep in mind that this scenario involves buying and holding onto your Ethereum until you make a profit from it.
If you do a lot of trading on a regular basis, the CRA may consider your profits as business income.
If that’s the case, you’ll have to file your crypto gains as income, which means the 50% commodity rate doesn’t apply. Many investors who purchase Ethereum or other cryptocurrencies are likely to trade it for other digital assets.
The thing to remember is that you won’t get taxed for owning digital assets. You get taxes when a taxable event occurs. These include:
- Exchanging cryptocurrency for fiat currency (CAD, USD, EUR, GBP, etc.)
- Gifting cryptocurrency
- Trading one cryptocurrency for a different cryptocurrency
- Using cryptocurrency to purchase goods or services
Each instance of buying, selling, or trading digital assets is considered a taxable event by the CRA. As ar result, these transactions should be reported when you do your taxes.
There are no loopholes when it comes to paying taxes on your crypto, so be sure you’re maintaining detailed records.
Unfortunately, crypto taxes can get more complex based on your behaviours. That’s why the CRA asks that you keep detailed records of your crypto transactions.
If you didn’t, do the best you can to report accurate information and hope you don’t get audited by the CRA.
Your records are critical to determining your capital gains throughout the year. However, what happens if those capital gains apply in multiple circumstances. That’s potentially the case with crypto taxes.
Let’s use another example. You purchase one ETH for $1,000 and its value shoots up to $10,000. However, instead of cashing out, you choose to trade your ETH for some contractor work. Because of this transaction, both you and the contractor are on the hook for taxes.
You, as the original owner, as responsible for the gains on the ETH. Since you owe 50% of the capital gains, you’ll have to pay taxes on $4,500 (50% of $9,000). The contractor has to report the value of the ETH as business income, which would be the full $10,000.
Trading and holding crypto is easy. You just pay 50% of your capital gains. Things get trickier when you decide to purchase goods and services with your crypto because you have to use the value of the asset at the time of the transaction.
If you just want to move your Ethereum from one of your crypto wallets to another one, you aren’t taxed on the transaction.
So if you discover that one crypto exchange provides more products and services than the one you’re currently using, transferring between the two is not a taxable event so long as you don’t sell any.
However, there are some tax implications associated with the transactions. For example, if you have to pay a transfer fee to move your crypto, there’s a cost associated with the transaction, which you can use to deduct come tax time.
You can deduct any fees you’re charged when transferring crypto from your capital gains.
Even though many crypto platforms will tout their tracking capabilities, the impetus is on you to maintain ownership of your transactions. Don’t rely on the crypto exchange you’re using.
Find a method that works for you and keep a detailed ledger of all the trades and transactions you make. Many traders prefer to use a spreadsheet.
Keep track of the following information:
- Value of the coin when you bought, sold, or traded it
- Date of the transaction
- How many you purchased, traded, or sold
You’ll also want to have additional items nearby when it’s time to do taxes. These include:
- Records from your digital wallet(s)
- Purchase receipts
- Exchange transactions
The goal is to keep track of as much information as you can. It’s not illegal to own, mine, share, sell, or trade Ethereum or any other crypto in Canada.
However, the CRA wants its cut of the taxes you owe, so you want to be as meticulous as possible in your record keeping. Plus, if you’re ever audited, you’ll have all the proof you need.
While you’re never going to get around paying Ethereum taxes in Canada, there are some ways you can make your tax liability lower. For instance, any capital losses you incur can offset your capital gains.
However, this is only applicable if you’re claiming capital gains on your tax return. If you decided to blow all your money on crypto and lost it all, you can’t claim capital losses to lower your income liability.
Another way you can offset your taxes is through a crypto business. If you run a crypto mining operation, you can claim business expenses, so long as they are relevant to the business.
So for crypto mining, you could claim hardware, equipment, rent, and utilities.
One other way you can reduce your tax liability is through your RRSP (Registered Retirement Savings Plan) or TFSA (Tax-Free Savings Account). These allow you to lower your crypto taxes until a later date.
When it’s time to retire and you want to withdraw from your RRSP, you’ll have to pay taxes on it. The expectation, of course, is that you’d be in a lower tax bracket by that time.
Some investors and traders aren’t comfortable doing their crypto taxes, which is why they look for an accountant with experience in that area. Find a reputable accountant who can guide you through the entire process. Or, if you don’t want to mess with it at all, you can have them file your crypto taxes for you.
With that in mind, no matter how you go about doing your taxes, you’ll need detailed records to do them accurately. Crypto investors like to use accountants who are familiar with crypto so they can get all their tax questions answered by an expert.
If you decide you don’t think it’s fair to pay taxes on your crypto gains, you’re breaking the law. Simply put, you’d be guilty of tax evasion, which is a crime that could wind up with you behind bars.
More often than not it doesn’t come to that, but the CRA does want to ensure that you’re paying your taxes so they’re getting their share.
Like it or not, the CRA can track your crypto transactions, especially if you do a lot of buying, selling, and trading. So, if you don’t report your taxes – or don’t file them accurately – you could wind up owing the CRA a lot of money.
Not only are they going to want the taxes you owe them, but they’re probably going to charge some interest to go along with it.
It’s not always easy to determine how Ethereum is taxed in Canada. More often than not it’s more complicated due to the various types of situations that apply to cryptocurrencies.
The CRA does what it can to make crypto taxes fair, so don’t try to cheat the system unless you want to pay a hefty fine or wind up in jail.