Wow, it’s tax season in Canada and everyone is talking about cryptocurrency! If you’re invested in bitcoin or other digital currencies, you’ll want to brush up on the rules and regulations when it comes to crypto taxes in the Great White North.
Please note that this article is for informational purposes only and does not constitute official tax advice. For personal tax, legal, or accounting advice, we recommend consulting a registered tax professional and/or lawyer.
How Is Crypto Taxed In Canada?
Simply holding onto your crypto isn’t considered taxable. So, if you’re a long-term HODLer, you can rest easy. The real tax trouble begins when you start making dispositions – that’s when you sell, trade, transfer, or gift your crypto to someone else.
According to the Canada Revenue Agency (“CRA”), these four activities are considered taxable events in the crypto world:
- Selling or gifting your crypto
- Trading or exchanging one crypto for another
- Converting crypto to good old Canadian dollars
- Using crypto to purchase goods or services
When you trade one type of cryptocurrency for another on Coinsquare or other digital asset exchanges, it’s a breeze. The catch? Each swap is considered a “disposition” and is a taxable event.
Just like trading crypto for fiat currency, when you trade crypto for crypto, you’ll need to calculate the value of the cryptocurrency you received in CAD and compare it to the amount you paid for the cryptocurrency you sold. This will determine if you have a capital gain or business income that needs to be reported on your taxes.
For instance, let’s say you bought 1 Bitcoin for $10,000 CAD. Time flies and your Bitcoin’s value has skyrocketed to $20,000 CAD! You decide to trade it for Ethereum on Coinsquare. When you make the swap, you are considered to have “disposed” of your Bitcoin at $20,000, resulting in a capital gain of $10,000 that needs to be reported.
Income vs. Capital Gain
For an average buy and hold investor, 50% of the capital gain from selling cryptocurrency is taxable and added to the yearly income. If trading activity is determined to be income, all profits or gains will be taxed as business income. If the CRA determines that you are operating as a day trader, your profits may be considered business income instead of a capital gain.
The CRA considers several factors when determining if cryptocurrency activity is personal or business, including:
- Intent of the taxpayer
- Nature and frequency of transactions
- Period of ownership
- Expertise and knowledge of cryptocurrencies
- Relationship between cryptocurrency transactions and the taxpayer’s ordinary business
- Time spent on cryptocurrency activities
- Type of financing required
- Advertised or publicly known cryptocurrency activity
Whether you’re a crypto enthusiast, a trader, or a creative genius, it’s crucial to be aware of the tax implications of your crypto dealings. In the following sections, we’ll delve into the details of each transaction and provide you with a clear understanding of the tax implications involved.
Airdrops in Canada are tax-free for individuals, but not for crypto businesses. If you’re just like most of us, enjoying some sweet, sweet crypto through airdrops, no need to worry about the tax man knocking on your door. But, if you sell the assets you received, that’s a different story! You’ll be subject to Capital Gains Tax.
The CRA uses the adjusted cost basis method, so calculating the cost basis for airdropped assets is a bit different from other scenarios. Since receiving airdropped assets doesn’t come with a cost, the entire sale will be taxed as a capital gain. Happy airdropping!
Just like any other digital asset, these non-fungible tokens, which can be songs, images, videos, and more, can come with a tax bill. But don’t worry, you’ll only get taxed on the profits you make from selling, trading, or exchanging your NFTs.
So, whether you’re a creative genius, selling your own original NFTs, or a savvy collector, flipping NFTs for a profit, here’s how taxes work for you:
If you’re the mastermind behind your NFTs, your earnings will be taxed as business income, and you’ll have to give 100% of the profits to the taxman.
But, if you’re a savvy NFT collector, selling NFTs you previously purchased, then only 50% of your earnings will be taxed as capital gains. So, keep calm and NFT on!
Say goodbye to mining and hello to staking! With proof-of-stake cryptocurrencies like Ethereum, Polkadot, Solana, Avalanche, and Cardano, you can earn crypto just by staking your tokens. The more you stake, the bigger your rewards – simple as that!
But hold on, before you start staking, you need to know about the tax implications. The CRA is likely to view any PoS earnings as income and therefore subject to income tax. That means the fair market value (“FMV”) of the tokens earned through staking on the date they are received is taxable.
- Staking earnings are likely considered taxable income by the CRA, with the taxable amount being the FMV of the tokens earned on the date received.
- If you dispose of the staking rewards by selling, exchanging, spending, or gifting them, you’ll incur capital gains tax. The cost basis is the FMV on the date you received the tokens, and the disposition price is the FMV on the date of disposal.
There are two types of forks in cryptocurrency: hard and soft. Hard forks occur when the code for a coin is changed, causing it to split into multiple versions. Soft forks, on the other hand, are updates to the code that are backward compatible with older versions.
As for tax implications, it’s unclear if new coins received from a hard fork are considered income. If you are in the business of trading or mining cryptocurrency you should report the newly forked cryptocurrency as business income at the time you gain access to it. Alternatively, you can choose to report capital gains tax only when disposing of the coins, but it’s recommended to consult a tax advisor before doing so.
Gifts and Donations
Gifting crypto is treated as a disposition and will be subject to capital gains tax calculation. This applies to gifts to individuals and charities. Note that only 50% of the profit is taxed. If you plan to donate crypto to a registered charity, it will be considered as a gift in kind and the charity will need to know the acquisition date. Donations made within 3 years are eligible for a tax receipt for the obtained value. Consult with a tax professional before donating crypto for tax credit purposes.
Lost or Stolen Crypto
Crypto theft, scams, and loss of access are unfortunately common occurrences. The CRA hasn’t issued a formal statement on stolen crypto, but they do allow capital losses for theft of other capital property. To claim a loss, you’ll need to show proof that you no longer have access to the stolen or lost crypto.
In addition to trading, there are several other taxable events involving cryptocurrencies, including:
- Using cryptocurrency to buy goods or services
- Loans using cryptocurrency
Why You Should Embrace a Crypto Tax Preparation Service
As a crypto investor, you probably handle multiple exchanges or wallets to buy, sell, and transfer digital assets. Unlike traditional stock brokers, cryptocurrency exchanges not only allow trading but also deposits and withdrawals of assets. This means that the transaction history of one exchange may not be enough to calculate your adjusted cost basis for an asset you obtained from another platform. Additionally, direct cryptocurrency-to-cryptocurrency transactions also pose a challenge in determining the adjusted cost base for tax purposes.
To tackle these challenges, crypto tax preparation services come to the rescue! They help you gather information from multiple exchanges, fill in the gaps, and provide an accurate statement of gains/losses for your cryptocurrencies. Coinsquare is excited to announce its partnership with CoinTracker, a tax preparation service, to make the tax filing process easier for you. With our partnership, first-time CoinTracker users can prepare up to 1,000 Coinsquare transactions free of charge. To help you prepare for tax season, we’ve rolled out a self-service tax summary feature. Clients on the Coinsquare platform will now be able to download their transaction summaries directly from their profile.
Wrapping it up
Crypto taxes don’t have to be complicated. With good record-keeping and the right tools, the process becomes a breeze. For more information and discussion on this topic, check out the official guidance from the Canadian Revenue Agency (CRA) and consult with a registered tax professional if needed. For any questions about your Coinsquare transactions or account, feel free to reach out to firstname.lastname@example.org.
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