Even if you are simply buying, trading, and selling cryptocurrency as an investment, the CRA may consider your earnings to be business income, especially if you do it frequently with the intent to make a profit.
Some of the factors the CRA considers when determining whether investment gains count as business income include:
- Frequency of activity
- Asset holding period
- Intention when purchasing assets
- Time spent on the activity
- The level of knowledge required to carry out the activity
“When it comes to cryptocurrencies, identifying whether your income is business income or capital gains is probably the most important reporting decision,” says Riley Strozzuk, senior financial planning manager at IG Wealth Management in Winnipeg. If you're not sure whether your crypto income is business income or capital gains, or how to calculate your crypto taxes, consult a tax professional.
How is cryptocurrency taxed in Canada?
As with other types of capital investments, you only report gains or losses in the tax year in which you dispose of them — that is, when you cash out or trade your holdings. So if you buy crypto and hold it, it's not taxable. The same goes for sending crypto from one exchange to another, assuming both wallets are yours. “This is the only major crypto transaction that's not taxed,” Strozzuk says.
All other cryptocurrency transactions are taxable, including exchanging cryptocurrency for another cryptocurrency, converting coins into cash, purchasing goods and services, and gifting cryptocurrency to charities, friends, or family. If the value of your cryptocurrency increases between the time you acquire it and the time you dispose of it, it is a capital gain (or business income, as discussed above), and if the value decreases, it is a capital loss (or business income loss).
Cryptocurrency ETFs hold cryptocurrency coins or shares in cryptocurrency-related companies and are subject to securities tax rules, but if you hold cryptocurrency ETFs in a registered account, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), the growth will be tax-free.
Cryptocurrency record-keeping tips
You'll need to keep detailed records of all your cryptocurrency activity for six years, which the CRA can request to see at any time. For each transaction, include a date and description (such as purchase, transfer, trade, etc.), the type of cryptocurrency, and its value at the time. (See the CRA's list of cryptocurrency records you should keep, including expenses associated with cryptocurrency mining.)
“If you're using the Coinbase exchange, you should be able to get all of the information by looking at the blockchain ledger,” says Maneisha. If you use multiple exchanges, it can be harder to keep track of all your activity, but she says you can use an app like Crypto Tax Calculator to aggregate the data.
Working with a tax professional can help ensure that the tax treatment of your transaction is calculated correctly and that the position you're taking is reasonable, says Maneisha. “This is especially helpful in the event of an evaluation or audit by the CRA.”
How to Report Cryptocurrencies on Your Income Tax Return
If you determine that your cryptocurrency earnings qualify as business income, you'll need to fill out Form T-2125 (Statement of Business or Professional Activities). It's a good idea to consult with a tax accountant. If you're running a cryptocurrency business, you should be able to deduct a variety of business expenses, including subscriptions, memberships, internet connections, and expenses related to your home office. “You can only deduct the business portion, not the personal use portion,” says Maneisha.
If your business income from cryptocurrencies (after expenses) is negative, it is considered a non-capital loss and can be deducted against other sources of income (including employment or investment income) for the year to reduce your taxes. If you don't have enough income to take advantage of the loss deduction, you can carry back your non-capital losses up to three years to apply them to your prior year tax return, or carry them forward up to 20 years to reduce future taxable income.
Capital gains or losses are reported on Schedule 3 of your personal income tax return. It's important to note that, as with any investment, capital losses can only be used to offset capital gains; those gains don't have to come from other cryptocurrency investments. “You can recoup losses in one sector to offset gains in another,” Storozuk says.
Finally, be aware of the superficial loss rule, aka the 30-day rule: “If you buy cryptocurrency or stocks and sell them at a loss, and you or a related party, such as your spouse, buys it back within 30 days, it won't be considered a loss for tax purposes,” says Maneisha.
Is there a way to exempt cryptocurrency earnings from income tax?
In short, you can't. “You can't hold cryptocurrencies in a registered tax-exempt account like an RRSP or TFSA,” says Maneisha. If you want to speculate on the cryptocurrency market in such an account, you can choose cryptocurrency ETFs or other related investments instead.
Are NFTs also taxable?
Yes, non-fungible tokens (NFTs) are taxable and the CRA will consider the same factors it does when assessing cryptocurrency activity. Again, keep detailed records of your transactions and consult a tax professional for advice.
If you have never reported your cryptocurrency income to the CRA, you may be subject to unpaid taxes, penalties, and/or interest on your capital gains or business income. You may be able to avoid or reduce these charges by voluntarily correcting your tax issues.
One final thing to keep in mind when preparing your tax return: the CRA does not accept payments in cryptocurrency, so if you owe taxes this year, make sure you have enough cash on hand to remit your payment. “A lot of people I've spoken to have all of their assets and liquidity invested in cryptocurrency, and this was a shock to them,” Maneisha says. “They didn't expect they'd have to cash out to pay their taxes.”
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