Published: March 10, 2020
Last Updated: October 18, 2023
Introduction to Crypto Tax in Canada
Canadians are early adopters of tech, digital, and investment trends, so it should come as little surprise that crypto trading and investing have gained significant traction among Canadian businesses, investors, and hobbyists. As the prevalence of these activities grows, the Canada Revenue Agency (CRA) is intensifying its efforts to monitor the crypto transactions of Canadian taxpayers – whether they take place inside or outside of Canada.
Ensuring compliance with Canadian crypto tax laws is crucial for avoiding costly tax audits and potential fines and interest or even tax evasion prosecution. This means that you must understand and adhere to the laws regarding crypto taxes in Canada and accurately report your taxable crypto activities on your return. Consulting a Canadian crypto tax lawyer or tax accountant who specializes in Canadian crypto tax laws before completing your return is one of the safest ways to ensure accurate reporting and paying of your crypto taxes in Canada.
What is Cryptocurrency?
Cryptocurrency is a type of digital or virtual currency. At its core, cryptocurrency uses advanced cryptographic techniques to ensure security.
Unlike conventional currencies governed by central banks or governments, cryptocurrency in Canada, and elsewhere, functions independently. Crypto transactions are recorded on a decentralized ledger called a blockchain, making them secure and transparent.
Paying Tax on Crypto in Canada
Crypto Tax in Canada: How the CRA Taxes Cryptocurrency in Canada
In Canada, the CRA considers cryptocurrency transactions as taxable events. Crypto is treated similarly to commodities for tax purposes. Consequently, any income or capital gain derived from crypto transactions must be reported by those required to file a tax return in Canada and will normally be subject to Canadian crypto tax laws.
Crypto Gains Tax in Canada: Do You Pay Taxes on Cryptocurrency Gains in Canada?
Yes, in Canada, you are required to pay taxes on cryptocurrency gains. Crypto gains are generally treated as capital gains. Fifty percent of your capital gains is taxable in Canada. Taxpayers must report their capital gains or losses using a Schedule 3 as part of their annual returns in accordance with Canada’s tax laws.
If, however, the Canada Revenue Agency determines that your crypto activities constitute a crypto business, you are not allowed to claim your crypto gains as capital gains but must report the income as business income that is 100% taxable.
Crypto Mining Tax in Canada
Crypto mining in Canada can also be considered a business activity. If the CRA sees your crypto mining activities as such, any income derived from mining crypto must be reported as business income. Canadian crypto miners can also deduct related expenses. However, if you mine occasionally, the CRA might treat your crypto gains as servicing, or as a taxable capital gain.
Crypto Loss Tax in Canada
In Canada, if you incur losses from your cryptocurrency transactions, these can offset capital gains of the same nature. These capital losses can be carried back or carried forward to offset future capital gains, providing relief in crypto tax obligations.
Crypto Tax Laws in Canada
CRA, not Canadian crypto tax laws, dictates that cryptocurrency is treated as a commodity for taxation purposes. However, any use, trade, or disposal of crypto can trigger a taxable event. The CRA expects Canadians to maintain detailed records of their crypto transactions to accurately report and pay any taxes owed.
Reporting Cryptocurrency Tax in Canada
It’s essential for Canadians to report their cryptocurrency transactions to the CRA. This includes both capital gains and business income derived from crypto activities, including mining or staking. Accurate and timely reporting ensures compliance with Canadian taxation laws and avoids potential penalties.
Bitcoin Tax in Canada
Bitcoins and other cryptocurrencies such as Litecoin, Dash, Tao and Ethereum are attracting more attention from the media and from Canadian taxpayers. Due to their nature, Bitcoins, like other crypto, are in use throughout various jurisdictions; however, not all countries treat cryptocurrencies the same way when it comes to crypto income taxation.
Crypto tax laws, particularly in Canada, are continually evolving. If you have concerns about how you should be reporting income you have earned in Bitcoins or other crypto, or how to report gains on the sale of Bitcoins, you should seek the advice of one of our experienced Canadian crypto Tax Lawyers. Being informed on crypto tax laws can help you avoid future problems with the Canada Revenue Agency (“CRA”).
What is Bitcoin?
Bitcoins are a type of virtual currency known as “cryptocurrency” and were originally created by an anonymous computer programmer in 2009. Cryptocurrencies like Bitcoin are designed to allow for anonymous exchanges, and they have become a cause for concern for income tax and other authorities the world over due to the potential for money laundering, tax evasion and other illegal activities. Since the creation of Bitcoin cryptocurrency, its value has seen dramatic fluctuations. So far, there have been three recorded crashes in the value of Bitcoins, in 2011, 2013, and 2022. During the 2013 crash, Bitcoins lost over 50% of their value in a single day, while in 2022, the BTC price plummeted below $20,000 in June after peaking at $68,000 in 2021.
There are 3 Ways in Which a Person Can Acquire Bitcoins
- Through the use of computers to create the Bitcoin in an online process called “mining.” Mining is a practice whereby a user sets up a computer or uses the cloud to run processes and solve algorithms that “discover” new coins based on the architecture of the currency when it is created. For all cryptocurrencies, there is a fixed upper number of coins, so once all are discovered, the coins have been “mined out,” and no further units will be available to miners. However, the mined crypto still exists and can be used for purchases and trade as usual.
- By purchasing them online through a Bitcoin exchange for traditional currency, this method is straightforward, but individuals must be aware of crypto tax implications, especially concerning gains and sales.
- Earning them as consideration in exchange for services. As with any other form of income, taxes are applicable on cryptocurrencies earned in this manner in Canada.
Given the uncertainty surrounding taxes and the taxation of Bitcoin and other cryptocurrencies in Canada, the tax consequences may be different depending on how they were acquired. It’s crucial to stay informed and seek expert guidance on Canadian crypto tax laws and regulations, ensuring compliance with the CRA.
Tax on Bitcoin in Canada: Is Bitcoin Taxable?
In response to a medical enquiry about the tax treatment of Bitcoin, the Income Tax Rulings Directorate issued comments on goods and services exchanges involving Bitcoin and other cryptocurrencies. In a March 2014 Technical Interpretation, the CRA provided some guidance and outlined its position regarding crypto tax and the income arising from Bitcoin and other crypto activities. The CRA’s position is that when a Canadian taxpayer pays for a product with cryptocurrency, the CRA will deem that transaction to be a barter transaction. When a taxpayer disposes of cryptocurrency, they will be subject to taxation in Canada as either an income from a business source or as capital gains from the disposition of property. Whether the gain is income or capital will depend on whether the taxpayer’s activities involving Bitcoin and other cryptocurrencies are of a sufficient commercial nature, as per the test in Stewart v the Queen, 2002 SCC 46. This view of CRA of crypto as a commodity and a barter transaction is not necessarily correct.
Bitcoin and Other Crypto as Barter Transactions
Understanding crypto tax laws in Canada, particularly concerning how barter transactions would be taxed with crypto used as currency, one needs to have a basic understanding of how a more traditional barter transaction works. In a barter scenario, when Canadian taxpayers pay for goods or services using cryptocurrencies like Bitcoin, they will need to include the fair market value of the goods that they receive into their income when they file their tax return, if the CRA would view their crypto activities as business activities. This is to ensure that the full value of the goods or services received is accounted for in a Canadian taxpayer’s income.
As an example, picture a Canadian taxpayer who owns a retail store and purchases a product with a fair market value of $20. The store owner uses crypto to pay for the product with, say, one Bitcoin having a value of $20. Because Bitcoin and other cryptocurrencies are not official currency, in order to ensure that the entire value sold to a purchaser of that product during the transaction is accounted for when determining the store taxpayer’s income for the year, the value of the product, $20, is used for tax purposes, not the value of the Bitcoin when the goods are sold.
Bitcoins as Income or Capital: Bitcoin Capital Gains Tax in Canada
Taxpayers who speculate in cryptocurrencies by buying and selling them using conventional currency will find that the Canadian crypto tax treatment is different than in a barter transaction scenario. Should a taxpayer choose to purchase and sell cryptocurrencies with an eye to making a profit, different rules apply.
Essentially, crypto can be thought of the same way as any other piece of capital property: when it is disposed of for a price higher than what was paid, a capital gain will arise, and one-half of the gain will be included in the taxpayer’s income on the Canadian tax return as Bitcoin capital gains tax.
This type of cryptocurrency transaction done many times over the taxation year could lead to further complications. For example, if a taxpayer in Canada repeatedly purchases and sells crypto for a profit, the CRA may choose to assess the taxpayer as being in the business of trading in cryptocurrencies and include all profits in the taxpayer’s income as business income instead of a capital gain.
Reporting Bitcoin Tax in Canada: Does Holding Cryptocurrency Create Tax Reporting Obligations?
In a Technical Interpretation issued in April 2015, the CRA noted that cryptocurrencies situated, deposited, or held outside of Canada that are not used exclusively in the course of carrying on an active business would be ‘specified foreign property.’ This means that the value of the cryptocurrency has to be reported in a T1135 Statement to the CRA every year by a Canadian resident for tax purposes if the total cost of all ‘specified foreign property’ (including cryptocurrency) is more than $100,000 in Canadian currency. For example, if a resident taxpayer in Canada already has T1135 filing obligations, he or she would need to include any cryptocurrency owned in their annual T1135 filings. Another example would be if an individual acquired crypto with a value in excess of $100,000 in total. The taxpayer must begin disclosing the value of the cryptocurrency in a T1135 form as part of their Canadian income tax return.
Additionally, an interest in a foreign partnership would be ‘specified foreign property’ if non-resident members’ shares of income or loss of the property are more than 90% of the total income/loss of the partnership. If a ‘specified foreign partnership’ holds cryptocurrency situated and held outside of Canada that is not used exclusively in the course of carrying on an active business, and if a Canadian resident for income tax purposes has an interest in the ‘specified foreign partnership,’ then the resident must report the value in a T1135 Statement.
Bitcoin Mining Income: Bitcoin Mining Tax in Canada
When a Canadian taxpayer is engaged in crypto mining of Bitcoin, whether taxed when the Bitcoins are created, or when disposed of, for example, by exchanging them for a recognized form of conventional (fiat) currency, depends on whether the taxpayer is carrying on crypto mining operations as a business or a hobby.
Bitcoin Tax in Canada Still Unclear
While it may seem that these rules about the tax treatment of Bitcoins are relatively simple, there is actually still a great deal of uncertainty.
The Canada Revenue Agency says that determining if a taxpayer in Canada’s crypto mining activities constitutes a business or a hobby is done on a case-by-case basis. This classification determines whether crypto miners must report their crypto gains as business income or capital gains or take the crypto into inventory and recognize income on the sale of that inventory and pay taxes accordingly.
Prudent advice from our professional Toronto crypto income tax lawyers and accountants is necessary to ensure that you do not fail in your reporting obligations.
Canadian Crypto Tax Lawyer Assistance
If you are concerned about the Canadian tax consequences of the selling or mining of cryptocurrency, get in touch with our Canadian Crypto Tax Lawyers. If you have holdings of crypto situated in Canada, and if you have not reported these assets, then it is likely that you need to disclose these foreign assets holdings to the CRA. You may need to do a voluntary disclosure to the CRA for your Bitcoin holdings. Effective planning is necessary to ensure that you pay only the taxes that you owe. Given the current uncertainty with respect to the tax treatment of Bitcoins, expert legal income tax advice is a necessity.
Disclaimer:
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
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