How To Report Crypto Taxes in Canada
Filing your tax return can be a long and tricky process. And if you are a crypto user, filing your taxes can get even more complicated. Some commonly asked questions about cryptocurrency taxes are:
- How do I report crypto on my tax return?
- How much crypto should I report on my taxes?
- Do I even have to report crypto on my tax return?
- What happens if I do not report crypto on my taxes.
To answer these questions, we have created this article to show you how to report cryptocurrency on your taxes. First, we will look at the basic concepts of cryptocurrency taxes in Canada
There are some general things to know about when it comes to cryptocurrencies and taxes in Canada. Cryptocurrencies are digital forms of money that can be used in a variety of ways. Some popular examples of cryptocurrencies include Bitcoin and stablecoins. While they can be used as legal tender, the Canadian Revenue Agency (CRA) treats cryptocurrencies as a commodity. Therefore, cryptocurrencies fall under two types of taxes: business income and capital gains. Each cryptocurrency is considered its own separate asset and is valued separately. When crypto is used to buy goods or services, the CRA treats it as a barter transaction, which is an exchange of good and services without the use of legal tender.
What is taxable?
Buying and possessing a cryptocurrency is not taxable. However, you could be taxed if you dispose your cryptocurrency. Disposition refers to the way you get rid of something, like selling a piece of furniture. Here are some example of cryptocurrency disposition.
- Sell or gift cryptocurrency to someone.
- Trade or exchange cryptocurrency, including crypto-crypto exchanges.
- Convert cryptocurrency to a government-issued currency, like the Canadian dollar.
- Use cryptocurrencies to buy goods or services.
Business income or capital gains?
An important thing to do is determine whether the earnings you received from cryptocurrency disposition falls under business income or a capital gain. This will influence how much of your earnings will be taxed.
According to the CRA, there are four common signs that indicate you might be running a business. The first sign is that you operate for commercial reasons and in a commercially viable way. Second, you act in a businesslike manner. This could mean that you create a business plan or acquire inventory. Third, you promote a service or product. The fourth and final sign is you demonstrate an intent to make a profit, even if it is unlikely to occur in the short term. Additionally, the CRA states that business activities regularly occur and become repetitive over time. For example, a person who regularly trades and exchanges crypto for their day job would fall under business income. Other examples of cryptocurrency business included cryptocurrency mining and cryptocurrency exchanges (like Binance or ATMs). If your earnings are considered business income, then you need to report 100% of it on your tax return.
Capital gains are the profits you earn when you sell an investment. They occur when you invest in an item and then sell it for more than what you paid. On the flip side, capital losses happen when you lose money on a investment; you sold it for less than it was originally worth. You can write this off on your taxes. For your earnings to be considered a capital gain, you will need to show that crypto trading is more of a hobby and general investment. An example of this would be buying Bitcoin, holding it for a few years, and then selling it when the price is high. If your earnings are considered capital gains, only 50% of it will be taxed.
Calculating and reporting cryptocurrency on your taxes
In general, it is a good idea of keeping records of all your cryptocurrency transactions. Having accurate records will help when it comes time to filling out your tax form. According to the CRA, you should record the following items for your crypto transactions:
- The date of the transactions.
- Receipts of cryptocurrency purchases or transfers.
- The value of the cryptocurrency in Canadian dollars at the time of the transaction.
- Your digital wallet records and cryptocurrency addresses.
- A description of the transaction and of the other party.
- The exchange records.
- Any accounting or legal costs.
- Any software costs charged to managing your tax affairs.
The CRA also suggests crypto miners keep records of:
- The receipts from buying crypto mining hardware.
- The receipts and records associated with the mining operation (e.g., power costs, maintenance costs, hardware specifications etc.).
- The mining pool details and records.
To calculate how much of your crypto earnings to report, your first need to find the initial price of the cryptocurrency, which is called the cost basis. This could be either what you paid for the cryptocurrency or its fair market value when you received it. You can find this information on one of the many cryptocurrency exchanges; they keep detailed records of transactions and the historical prices of cryptocurrencies. Once you have found your cost basis, subtract it by the amount earned form the crypto sale. This will give you your net profit. The net profit is what you will report on your tax return. Here is an example that illustrates the process:
John sells his computer to a friend, who pays him with $1,000 worth of Bitcoin. John decides to hold on to the Bitcoin. Six months later, the value of his Bitcoin jumps to $5,000. John decides to convert his Bitcoin to Canadian dollars.
John’s cost basis is $1,000. He sells his Bitcoin for $5,000. To determine his total earning he will use this equation:
$5,000-$1,000 = $4,000. His total earnings come to $4,000. Since his earnings are considered capital gains, he will only be taxed for 50% of the value, which is $2,000.
Jane regularly buys and sells cryptocurrencies. She studies the market fluctuations in the value of cryptocurrencies, and as result she nets a profit. In January of 2022, Jane sold $350,000 worth of Bitcoin, which she originally bought for $100,000. Taking her selling price and subtracting it from the cost basis, Jane’s net profit comes to $250,000. Since Jane is actively trading in cryptocurrency, her earrings are considered business income. She must report all of the $250,000 on her tax return.
Use the Schedule 3 tax form to record capital gains or losses. For business income, use the T2125 tax form.
Frequently asked questions about cryptocurrency and taxes
Do I have to report NFTs on my tax return?
NFTs (non-fungible tokens) are digital items that hold a monetary value. They can be videos, photos, GIFs, and most commonly art. NFTs are considered a form of cryptocurrency. Therefore, they are treated they same why when it comes to taxes. Buying and holding and NFT is not taxable. However, the income you make from selling, trading, or exchanging NFTs is. If you created and sold your own NFT, the earnings are considered business income. If you sell a previously purchased NFT, then the earnings are considered capital gains.
Do I have to pay GST or HST for crypto?
This depends on whether you paid for a product or service with cryptocurrency. If so, you probably need to pay GST or HST. The amount for these sales tax is calculated based on the fair market value at the time of the exchange. For example, a business that accepts cryptocurrency as a valid form of payment must calculate and report the owed GST or HST amounts for sales based on the cryptocurrency value that day.
What happens if I do not report crypto on my tax return?
The anonymous and decentralized nature of crypto has led some people to not report their earnings on their tax returns. Although blockchain keeps a record of the transactions that have occurred on its network, the identities of the buyers and sellers are almost never revealed. However, the CRA is developing techniques to catch crypto tax dodgers. For example, you could be investigated or audited by the CRA to determine if you are reporting crypto earnings on your tax return. Additionally, some cryptocurrency exchanges have provided customer identification to tax authorities. Anti-money laundering laws also require exchanges to provide personal details of their customers. Even the blockchain can be investigated. Blockchain investigation firms use advanced analytics tools to track down owners of anonymous crypto wallets.
Failure to report crypto earnings on your taxes is considered tax evasion. You would face the same consequences as you would if you did not report Canadian dollar earnings. For example, tax evasion can lead to fingerprinting, jail time, court-imposed fines, and a criminal record. You would also have to repay the full amounted of the taxes you owed, plus additional interest and any civil penalties charged by the CRA. In severe cases, the courts can fine up to 200% of the taxes evaded and impose up to five years in jail.
How can I pay lower taxes on cryptocurrency?
There are some tips to lower the amount you will pay for crypto earnings on your taxes.
- Offset capital gains with capital losses: This is a strategy some people use with regular capital gains. Capital losses can be claimed on your tax return, which reduces the amount you pay for your profits. You can use as much of your capital losses to offset your capital gains. Depending on the situation, capital losses can offset gains in the same year, up to three years prior, or for future years.
- Make donations with cryptocurrency: In Canada, people who make charitable donations can receive a tax credit (a reduction in the taxes you owe) called a charitable tax credit. To qualify for this tax credit, your donation must be made to qualified done. Some examples include registered charities, registered journalism organizations, and registered Canadian amateur athletic associations. If you received a gift in return for your donation, then its value is subtracted from your donation amount. The tax credit only applies to the resulting difference. The federal charitable tax rate is 15% on the first $200 and 29% on the remaining $200. Provincial rates vary, but they generally fall between 4% and 24%.
- Basic personal amount: This applies if your only income comes from cryptocurrency. The basic personal amount is a non-refundable tax credit. It allows you to earn a certain amount of money before you need to pay taxes. The current amount is $13,808. The basic personal amount ensures you maintain a base level of income with crypto before you need to report it on your tax return.
Can the CRA track cryptocurrency?
Answers to this question vary. Some people claim that the CRA cannot track cryptocurrency due to its decentralization. While the CRA cannot track every crypto transaction, they can link you with a crypto exchange. If your crypto exchange is registered with FINTRAC (Financial Transaction and Reports analysis Centre), they are required to verify your account by obtaining a government issued ID and proof of address. While the verification process protects you from scams and theft, the information can be used by the CRA to link you to the exchange. From there they can access a history of your past transactions. The CRA can also link you to your crypto wallet. Because blockchains are public, anyone can view past transactions on the network. Wallet address will be stored on the network’s ledger. The CRA could access a blockchain, find your wallet address, and link it to you. If that happens, all your crypto transactions are documented.
With that being said, the CRA has a harder time tracking cryptocurrency transactions on crypto exchanges not registered with FINTRAC. So, if you do not want the CRA tracking your crypto transactions, then you could use one of these unregulated exchanges.
Still, we recommend you follow Canadian tax laws. Tax evasion has serious consequences in Canada. You could end up paying thousands of dollars in fines. Or in extreme cases, you could face jail time.
Which countries do not tax Bitcoin?
Although the list is small, there are countries which do not tax cryptocurrencies. In 2022, the list includes:
- Cayman Islands
- El Salvador
- Puerto Rico
To take advantage of the countries tax break, you first need to become a tax resident. Excluding the Cayman Islands, where there is no taxation, each country differs in how you become a tax resident. For example, you have to live in Germany for six months to become a tax resident. In Belarus, you must spend more than 183 days in the country and not have tax residency any where else.
Keep in mind that the rules surrounding crypto taxation often changes. Any one of the countries on the list could being taxing cryptocurrency in the near future.
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