Tax time is fast approaching, and if you’ve had any bitcoin and other cryptocurrency gains or losses within the year, you may have a few questions about how to report them in your returns. The good news is that the Canada Revenue Agency (CRA) has clear guidelines on the tax treatment of cryptocurrency transactions and digital assets. In fact, Canada’s taxation system for cryptocurrencies is more developed compared to many other countries.
However, with cryptocurrencies being a relatively new technology, tax rules are still evolving in Canada as much as in any other country. If you’ve been involved in cryptocurrency mining, investing, trading, or staking, you will want to keep tabs on the latest tax requirements as per the CRA. This ultimate guide provides you with essential information about how to pay taxes on bitcoin and other cryptocurrencies in Canada.
Disclaimer: Please note that this article is strictly for information purposes and does not, by any means, constitute professional tax, trading, investment, financial or legal advice. If in doubt about your tax obligations, consider consulting a qualified tax professional.
Do you have to report Bitcoin on taxes in Canada?
Yes, cryptocurrency is taxable in Canada. This is because the Canada Revenue Agency (CRA) treats all digital currencies – including cryptocurrencies like Bitcoin, Bitcoin Cash, Ethereum, Tether, and BNB – as commodities that are equivalent to assets rather than legal tender. As such, they are subject to the Canadian Income Tax Act just like any other investment property (like stocks, for example). Therefore, any transactions involving such currencies are not exempt from the CRA’s tax obligations.
As a cryptocurrency holder, you are legally required to keep track of all the transactions involving your coins and tokens. Further, it’s your obligation to calculate the value of each transaction in Canadian dollars and ultimately report any gains or losses in your tax returns either as business income or capital gains, depending on the nature of the transaction (more on this shortly).
When keeping records of transactions, you will want to include any expenses incurred in the process. These include costs of software, hardware, exchange fees, and other related costs (like gas fees) for making the transaction on a network. Since Canada uses the adjusted cost basis method of taxation, you may deduct all eligible cryptocurrency expenses when preparing your tax returns. This is good news for Bitcoin and other cryptocurrency holders and traders because expenses involving fiat currency are not always deductible. In fact, while it’s beneficial to keep detailed records of cryptocurrency transactions for the sake of deductions, you may not always need to have an extensive record of fiat currency transactions.
With that in mind, you may be wondering which cryptocurrency activities are taxable in Canada. Generally, a transaction is subject to tax if it involves:
- Earnings from mining activity and staking of cryptocurrencies
- Selling cryptocurrencies for fiat currency like the Canadian dollar
- Using cryptocurrencies to pay for goods or services
- Giving cryptocurrencies as a gift
- A cryptocurrency barter transaction, i.e., trading cryptocurrency for cryptocurrency, like selling one coin for another
- Any other activity that results in you disposing of your cryptocurrency
In Canada, there is no tax obligation for simply holding bitcoin and any other cryptocurrency. You will only be required to pay tax when you dispose of it for another cryptocurrency or fiat currency like the Canadian dollar.
How is Bitcoin taxed in Canada?
Since cryptocurrency is considered a commodity in Canada, the Canada Revenue Agency (CRA) treats it as property for tax purposes. For this reason, it’s very important that you establish whether a transaction is a capital gain or business income. The reason behind this is simple: while 100% of business income is taxable, only 50% of capital gains are subject to tax.
If you are an ordinary Canadian who buys bitcoin and other cryptocurrencies to hold (rather than to sell as a means to carry on a business), you may need to pay a capital gains tax on your cryptocurrency earnings. This implies that you only use cryptocurrency as an investment. Your goal is to get a capital gain if you eventually sell Bitcoin and other cryptocurrencies at a higher price than their purchase price. In this case, you will need to include 50% of that earning in your taxable income. This is known as a capital gains tax.
What if you sell Bitcoin at a loss?
The CRA allows taxpayers to use net capital losses to lower their taxable capital gains. This means that you may use the loss to offset against any capital gains. In fact, you may carry cryptocurrencies capital losses forward for three years if you don’t currently have any capital gains to offset those losses against. But keep in mind that you may only use capital losses to offset against capital gains. You can’t use them for other types of income, such as employment.
If you trade bitcoin and other cryptocurrencies rather than hold them – that is, you buy and sell them on cryptocurrency exchanges as a day trader – the CRA may classify your profits as business income. In this case, 100% of it will be subject to tax. Obviously, classification as capital gains tax is more advantageous because you only pay tax on 50% of your cryptocurrency earnings.
How does the CRA determine whether bitcoin and other cryptocurrency profits are subject to capital gains tax or business income tax? For one, the agency has provided a list of signs that your transactions involve carrying on a business. They include:
- You conduct your cryptocurrency activities in a business-like manner. This includes things like acquiring assets and preparing business plans specifically for enhancing your cryptocurrency activities.
- Your bitcoin and other cryptocurrencies activity are for commercial reasons and you carry it on in a commercially viable manner.
- Your cryptocurrency activity indicates that you intend to make a profit. This holds true even if you don’t actually make any profit in the short term. Your intention to make profits matters more than your ability to realize it.
- You promote a particular product or service in the course of your bitcoin and other cryptocurrencies activity.
Beyond that, the CRA and Canadian courts may apply other criteria when determining whether your cryptocurrency activity relates to personal or business transactions. Some of the factors that may come into play include:
- Nature and frequency of your cryptocurrency transactions
- The duration over which you have owned the currency
- The amount of time you have spent doing cryptocurrency activities
- Your intentions (mostly with regard to profits)
- Your level of knowledge and expertise in bitcoin and other cryptocurrencies
- Whether or not there’s a relationship between your ordinary business and cryptocurrency transactions
- If you have made it known or advertised that you engaged in bitcoin or other cryptocurrencies trading
At the end of the day, it’s important to examine each cryptocurrency transaction separately to accurately determine if it qualifies as a business or personal activity. For many Bitcoin and other cryptocurrency traders and holders, the general belief is that cryptocurrency business activities must have some regularity. But that’s not always the case. For example, the CRA may judge an isolated cryptocurrency-related activity as a business transaction if you intend to sell the currency for profit. This may be deemed an adventurous purchase that amounts to a business transaction and therefore a trade.
How to file Bitcoin taxes in Canada
Step 1: value the cryptocurrencies
Before filing your tax returns, you will need to start by valuing your cryptocurrencies. The first thing to keep in mind is that every type of cryptocurrency is treated as an individual asset. If, for example, you earn profits from Bitcoin and Ethereum, you will have to value and report them as separate commodities in your returns.
Secondly, you can value your Bitcoin and other cryptocurrencies as either inventory or capital property. It is inventory if you use it for business purposes (to generate business income). In such a case, you may value the currency at its fair market value at the end of the year or at cost when you acquired it – whichever is lower. If you are holding your Bitcoin and other cryptocurrencies as capital property, you are required to record its adjusted cost base, which you can then use to accurately calculate and report capital gains tax on it.
Thirdly, cryptocurrency in Canada is taxed based on disposition. This means that you don’t need to pay any cryptocurrency taxes for holding it, even if it gains value. However, you are subject to taxation any time you sell, exchange, trade, convert or use Bitcoin and other cryptocurrencies to pay for goods and services.
Step 2: calculate GST/HST
The goods and services tax/harmonized sales tax (GST/HST) is a type of value-added tax that’s charged by the Canadian government. While the liability for this tax is levied on the buyer, the obligation to collect and remit generally falls on the vendor or seller. Therefore, if you are a business owner who accepts cryptocurrency as a method of payment, you will need to calculate your GST/HST. You can often do this based on the fair market value of the digital currency received for the good or service sold.
Say, for example, that you sell fashion items and accept Bitcoin and other cryptocurrencies as payment. If you sell a shirt for bitcoin, you must determine the fair market value of the shirt in Canadian dollars and attach the same value to the bitcoin received. You will then include this value (in Canadian dollars) in your GST/HST return as revenue.
At the same time, if you use Bitcoin and other cryptocurrencies to buy a good or service, you are required to report a capital gain or loss on its disposition in the same way you would report a gain or loss in any other capital asset. Needless to say, this subjects you to a capital gains tax.
Step 3: report your Bitcoin in tax returns
According to the CRA, if you have earned capital gain from Bitcoin or other cryptocurrencies, you will need to report 50% of it using Schedule 3. On the other hand, if you have earned business income from the cryptocurrencies, you will need to report 100% of it on form T2125.
Step 4: do your taxes
It goes without saying that alongside your Bitcoin and other cryptocurrencies’ gains and losses, you will also need to report your other incomes. This is the normal process of filing returns in Canada.
Don’t forget to claim all eligible deductions, credits, and expenses, and then get your tax slips (like the T4 and T4A). You can then file your completed tax returns either online or on paper. Make the due payment and later claim any refunds that you may be entitled to.
What happens if you don’t report Bitcoin income on taxes?
Failure to report cryptocurrencies earnings on taxes attracts the same punishment as failure to report Canadian dollar earnings. If convicted of tax evasion in Canada:
You will still be required to pay the full amount of taxes evaded, plus interest
You will be required to pay civil penalties as determined by the CRA
You may get a fine of up to 200%
You may be imprisoned for a term of up to five years. If it comes down to tax fraud, the sentence may go up from five to 14 years.
It’s worth mentioning that Sections 231.1 through 231.4 of the Income Tax Act grant the CRA powers to investigate taxpayers. Therefore, if you fail to report Bitcoin (and other cryptocurrencies) income on your returns, the agency may employ these powers to find and convict you. This applies to both capital gains tax as well as income tax.
Feeling unsure? Talk to a professional
Considering the consequences of cryptocurrency tax evasion and fraud, it’s always a good idea to consult a tax professional if you are not sure how to go about reporting and paying taxes on Bitcoin and other cryptocurrencies in Canada. The country has a wide selection of cryptocurrencies and tax experts who can help you stay compliant as an individual and/or business entity. With the right advice, you will know whether you need to treat your cryptocurrency taxes as capital gains tax or income tax. Beyond tax treatment, you may easily find out the exact amount due on each cryptocurrency asset.
As you do so, remember to use an automated bill payment system that can help you keep a record of all your transactions for tax purposes and reference. Bitcoin Well can help with this, particularly if you are looking to pay your bills using Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH) or Bitcoin Cash (BCH). Our system allows you to pay up to 99.9% of payees, including all the major credit cards – all while keeping accurate digital wallet records. What’s more, you get 24/7 access to your funds. No limitations are imposed by banking hours!
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