Updated: Dec 25, 2022
Despite the volatility in cryptocurrencies, it has been a good year for those who had invested in Crypto at the beginning of 2021. Bitcoin is still up 18% and Ethereum is up a whopping 218% just from January 1, 2021 alone.
For those who had sold and managed to cash out for good gains during the year (or those who are considering selling), you are probably wondering how much taxes you will need to pay on the money you had made. Let me breakdown how much taxes you may potentially owe so you can better prepare yourself.
Before I start, let me give you a little bit of background on cryptocurrency status in Canada.
How the Canadian Revenue Agency (CRA) views Cryptocurrencies ("crypto")
According to the CRA, cryptocurrency is not recognized as a "legal tender" (ie. courts don't recognize it as money) and views it as a "digital representation of value" used as a medium of exchange for goods and services between people who agree to use it.
For tax purposes, CRA treats crypto as a commodity, any income from it as (i) business income or (ii) capital gain, and any losses as (i) business losses or (ii) capital losses. The distinction between business income and capital gain will be discussed below and is important to assess in order to determine how you are taxed.
Note: Buying/selling crypto directly is not supported through Tax-Free Savings Accounts (TFSA) nor Registered Retirement Savings Plans (RRSP) since, but you can buy securities like ETFs that hold crypto. For more information, read more about it here.
Business Income vs. Capital Gain
While holding onto crypto is not a taxable event, you are required to report to the CRA any dispositions of crypto. Dispositions mean that you sold or transferred you ownership in exchange for money (Canadian $), other crypto (ie. Bitcoin for Ethereum), or even for goods/services.
When the disposition happens, the income or loss you occur can be considered business income or capital gain. The difference between the two is that a business income gets included in income at 100% whereas capital gain only gets included at 50%. So if you made $100 income from selling crypto and your marginal tax rate is 30%, you will have a tax liability of of $30 if it's considered business income and only $15 if it's considered capital gain.
Contrastingly, if you had incurred a loss, you would prefer business loss vs. capital loss, since business loss you can offset other sources of income (such as other business or employment income), whereas for capital losses, you can only offset against capital gains.
If you are a casual buyer of crypto and your intention is to hold it as an investment, most often than not, the income/loss will be considered capital gain/loss. However, if you are buying and selling crypto frequently, holding it for short periods of time, and your intent is to make a profit, than your income/loss will mostly likely considered business income/loss.
Some examples of business activities would be crypto trading/dealer, mining, exchanges (ie. ATMs). Essentially, if an outsider looks at what you're doing and it looks like you are operating a business, than it will most likely be considered as a business in the eyes of the CRA.
There are some cases where a single transaction can be considered a business - based on whether it is in the adventure or concern in the nature of trade (need to be determined on a case by case basis).
When crypto is used to pay for goods or services, CRA treats it as a barter transaction (ie. an exchange that doesn't use legal currency).
For example, when a dentist provides dental services to a plumber in exchange for plumbing services in his home, this is considered a barter transaction and the fair market value of such services may be subject to income even though no money had been exchanged.
Calculating Taxes on Income from Cryptocurrencies
There are two numbers you need to calculate the income earned on disposing of crypto - the cost and the sale price (ie. fair market value). You are required to keep records of your crypto transactions for at least 6 years. This can be relatively simple if you use crypto exchanges where you can export the information, such as the following:
the date of the transactions
the receipts of purchase or transfer of cryptocurrency
the value of the cryptocurrency in Canadian dollars at the time of the transaction
the digital wallet records and cryptocurrency addresses
a description of the transaction and the other party (even if it is just their cryptocurrency address)
the exchange records
accounting and legal costs
the software costs related to managing your tax affairs.
For example, let's say you live in BC, Canada and bought Ethereum for $1000 in 2018 and sold for $4000 during its peak in 2021. The income you made is $3000 ($4000 less $1000). If you make $70,000 of employment income, than you will most likely fall into the taxable income range of $49,020 up to $84,369 at marginal tax rate of 28.20%. If the sale of Ethereum is considered business income, you will be taxed additional $846 ($3000 *28.20%), whereas if it's considered capital gains, it will be taxed $423 ($3000*14.10% OR $3000*50%*28.20%).
Combined Federal & BC tax brackets and tax rates
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Disclaimer: Please note this post is not tax advice. Consult your tax advisor on the specifics of your situation so they are better equipped to determine your tax liability. Refer to the CRA website for more guidance on taxes related to crypto.
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