Is Crypto Taxed in Canada?
Tax season is here and many Canadians are wondering if crypto investments are taxed. The answer is: yes, cryptocurrencies are taxed in Canada.
To help you understand how crypto is taxed by the CRA in Canada, we spoke with Eric Cohen, Partner at VCG S.E.N.C.R.L / LLP (a Montreal-based accounting firm with experience in cryptocurrency investments). We put together his answers for you in this blog post but before we get started we’d like to remind you that this piece is not financial advice. It is informational only and a very high level overview of crypto-related taxes. For proper financial advice, we recommend you speak to your tax professional.
How is cryptocurrency taxed in Canada?
Depending on how you’re using cryptocurrency you will be taxed accordingly (i.e: using it as a means of exchange, trading, mining or staking). Most Canadians will fall under the trading category because they’re simply just buying and selling. In this case, the trade would typically be taxed as a capital gain.
A capital gain is an increase in an asset’s value (or profit). They are taxed when these gains are realized (or sold). Put another way, you have a capital gain when you sell or are considered to have sold your asset.
For example, you sold all your bitcoin for $70,000 CAD but you originally bought it for $30,000 CAD. Your capital gain is $40,000 CAD.
In Canada, 50% of your capital gains are taxable. So of the $40,000 profit you made upon selling, you would have to report $20,000 as income for your taxes on Section 5 on Schedule 3 of your income tax return.
Capital loss is the inverse. It’s when the value of your investment decreases from the original price you bought at. Capital losses can be used to offset capital gains and reduce the overall tax you have to pay.
Some traders may be subject to business income instead of capital gain. Speak with your tax professional to determine the proper taxation treatment.
What crypto transactions are taxable in Canada?
Various crypto-related activities like selling, converting crypto to crypto, gifting and so on get taxed differently.
Selling crypto: If you buy cryptocurrencies and sell them at a higher price that’s typically considered a capital gain. Remember, 50% of your (realized) capital gains will be taxed at your tax bracket in Canada.
Transferring crypto: If you bought crypto from Netcoins and then transferred to a crypto wallet or another discount brokerage, this is not considered to be a taxable event and therefore you do not have to file taxes for this. That’s because you’re still in possession of your crypto and a taxable event (like selling) hasn’t occurred. It would be similar to transferring dollars from your checking account to your savings account and not having to pay taxes on it.
Crypto-to-crypto conversions: If you’re converting a cryptocurrency for another cryptocurrency (i.e: bitcoin to ether) a transaction has officially been made, a taxable event has occurred, and you will have to pay capital gains on it. Now taking it a step further, if you convert from bitcoin to ethereum to litecoin, each individual conversion should be reported on and each capital gain should be reported and filed for.
Using crypto: This depends on how you’re using crypto and whether or not the rule for barter transactions needs to be applied. Let’s pretend you owned bitcoin and you used it as a downpayment for a house. Now, let’s assume your bitcoin has appreciated in value by $5,000. In theory, you have a $5,000 capital gain. But if you actively use bitcoin as a means of exchange to buy goods, similar to using CAD, no revaluation is needed.
This is also comparable to holding USD in your bank account. If you buy $1,000 USD today that’s worth $1,300 CAD. You would not report the $300 “gain” because your USD balance is used for transactions, not investments.
It can be helpful to separate your crypto holdings between investment purposes and daily transactions – mainly because crypto used for investment purposes will be subject to valuation gains and losses while crypto used for daily transactions may not be subject to the same taxation rules.
Gifting crypto: In Canada you can gift anything to anyone, tax-free. However, here’s where it gets a little tricky: “what was the purpose of the crypto to begin with?” Did you buy it with the intention of investing in it at first before gifting it? Or was it always meant to be a gift? With the first case, you may need to pay tax on it (but the recipient will not). In the second case, neither party will have to pay taxes on it.
If you buy crypto but never touch it, do you have to report it?
If your crypto is just sitting on profits and you haven’t sold, then that’s considered an unrealized gain. You do not have to report this. Again, here’s where it gets a little tricky…
If, as a Canadian, you hold over $100,000 CAD worth of cryptocurrencies within a foreign crypto exchange, like Coinbase, you will have to fill out the T1135 form (the “Foreign Income Verification Statement”). This is a form that we file with the Federal government to report investments over $100,000 CAD that are held outside of Canada during the year. The word “during” is important here.
Let’s say you had $150,000 in Coinbase during the year but then transferred to Netcoins at the end of the year. You’ll still have to file the T1135 form because your investments were outside of Canada at some point throughout the year. If you don’t file this form, you can be assessed a $2,5000 penalty per year plus interest and other fees. If you own less than $100,000 abroad then you don’t need to fill out the form.
Note: If you hold over $100,000 CAD worth of crypto on Netcoins, the T1135 form is not required as Netcoins is a Canadian exchange.
The T1135 form is purely informational and will not impact your taxes. The Canadian government just wants to know if you have investments “outside” of the country (given what happened with the Panama papers around five years ago).
Is crypto mining taxable? What about staking or yield farming?
This depends on whether it’s a hobby or not so this is assessed on a case by case basis. In general, a hobby is undertaken for simple pleasure or enjoyment. If mining is pursued with more of a business-oriented manner, the tax treatment will be different.
For example, if it’s just you mining a bitcoin as a hobby and you make $30,000, you’d pay capital gains on that. But if you set up an entire operations system with 20 miners, then you’re mining with the purpose of creating a business and you’ll be taxed accordingly (on business income).
With respect to staking, the income from staking is treated as interest income with the drawback being that it falls under a high tax rate. This tax rate will be determined by each person’s overall taxable income (which is also subject to the marginal tax rate).
For example, a person in BC earning $40,0000 salary and earns $5,000 of staking revenue can expect to pay about 20% taxes on their staking revenue. But, a person in BC earning a $100,000 salary and earns $5,000 staking revenues can expect to pay about 33% taxes on their staking revenues. For more information on your tax bracket, visit Taxtips.ca
It’s always advised to do your own research and speak with your tax advisor if you have any questions.
Need help filing your crypto related taxes?
Connect with Eric Cohen at [email protected]
Visit Taxtips.ca to find out relevant and useful tax information, including your income tax bracket
Resources we referenced:
Schedule 3 – Summary of Dispositions – Capital Gains (or Losses)
T1135 – Foreign Income Verification Statement
T2125 – Statement of Business Activities – if you have “business” activity from any of the above transactions, individuals would need to fill out this form on their personal tax returns.
Writer, content marketing at Netcoins.