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Canadian Cryptocurrency Tax Guide

Introduction

With the historic rise of a brand new asset class, cryptocurrencies have become in need of some vital taxation rules by the CRA as the total value of the cryptocurrency market almost reaches two trillion. However, the CRA has come under criticism for being way behind the curve when it comes to basic cryptocurrency taxation and even further behind the taxation of DeFi, or decentralized finance, and all the different protocols which come with it. 

If you are living and trading cryptocurrency in Canada, you must follow their specific guidance on what rules currently apply to the crypto sphere. With our guide, you will quickly learn how to be tax efficient with your cryptocurrency.

The CRA splits cryptocurrency taxation into capital gains and income. Capital gains come from disposing of assets, such as when you sell bitcoin (provided you make a gain). Business Income comes from activities that generate additional income for you, such as staking and liquidity pools.

All crypto assets that they deem to be taxable, will be taxed at their fair market value at the date of disposal. Capital gains tax is directly linked to the taxpayer bracket you are in. For example, if you are in the highest federal income tax bracket, you will pay 33% capital gains tax on any cryptocurrency that you dispose of. This is because Canada does not have a specific capital gains tax rate. The good news is, you will only pay capital gain tax on HALF of your capital gain, creating an adjusted highest capital gains tax rate of 16.5%. (33/2)

There are several provincial tax rates in Canada, which you can find here. However, for this guide we will be following the Federal tax brackets to avoid confusion. It is important to make sure you are following the specific tax rates of the province you reside in.

  • Canadians have an annual personal allowance of $14,398 for the 21/22 tax year
  • Canadians have no specific capital gains allowance, as there is no specific capital gains tax rate.

These are the Federal tax brackets in Canada

Can The CRA Track Crypto?

In short, Yes, CRA is tracking users of centralized exchanges (CEX) through their Know Your Customer protocols (KYC).

The CRA has confirmed that they are working with Coinsquare, to ensure investors are accurately and promptly recording and reporting their crypto investments with the CRA. Although communication with many other exchanges, such as Binance, have not been confirmed, it would be good practice to assume records have been exchanged with the CRA. With this information, the CRA essentially knows all the crucial dates of your trades, when you initially invested into crypto and when you cash out. Although cryptocurrency was first popularized for it’s decentralized nature, centralized exchanges have made the information public to the CRA by necessity of KYC.

However, not all transactions are as easy to track. For example, in DeFi, there are many decentralized exchanges (DEX), such as Uniswap or pancake swap, which are trustless and permissionless, not requiring any authentication which keeps the user completely anonymous. 

Trading on a DEX or holding your cryptocurrency in a cold wallet offline requires private wallets such as a Metamask wallet, where the user holds their keys and transactions completely privately, as the wallet does not require KYC. Because the blockchain is anonymous, the CRA will find it extremely hard to track all transactions and the movement of funds. However, if you suddenly receive a large amount of funds from a private wallet into a hot wallet on an exchange, it will arouse suspicion. CRA is partnered with FINTRAC to investigate large instances of money laundering and tax evasion, even in the crypto space.     

Remember: The more mainstream cryptocurrency becomes, the more regulation will ultimately follow, so recognizing when and how your crypto can be tracked is extremely important for tax purposes. 

Calculating Your Capital Gain

CRA requires cryptocurrency users to calculate their gain using a Cost Basis. This can be done by adding the total fair market value of the crypto you buy and any purchase fees together.

Using your cost basis, a capital gain will occur if you sell above this cost basis or capital losses if you sell below this value. Capital losses can be used to offset future gains, so it’s important to keep hold of the record!

Example:

Kate lives in Vancouver, B.C.

In 2020, Kate buy’s 1 Bitcoins for $20,000. Kate has no remaining allowances..

Kate HODLs her bitcoin for two years, finally selling her bitcoin for $60,000.

To calculate her capital gain, we take her selling price, and minus her cost basis to find out her total capital gain.

For Kate, her gain is ($60,000 LESS $20,000 cost basis), giving her a taxable gain of $40,000. However, the CRA states you must only pay tax on half your capital gain.

She is in the lowest Federal tax bracket of 15%, her provisional tax rate is 5.06%

Her gain is divided by two ($20,000), leaving a taxable amount of $20,000.

On her taxable $20,000, she will be taxed at 20.05%, giving her a total tax payable amount of $4,100 for the 21/22 tax year.

What Classifies as a Disposal?

Remember: A capital gain is only triggered once capital assets are disposed of, and a gain is made.

The CRA recognizes several activities as disposals

  1. Gifting Cryptocurrency: To anyone
  1. Trading Cryptocurrency: Trading crypto-to-crypto, inclusive of stablecoins.
  1. Selling Cryptocurrency: For fiat or other cryptocurrencies.
  1. Spending Cryptocurrency: On goods or services in the real or virtual world.

It’s not all bad news, the CRA does not view all cryptocurrency transactions as disposals and taxable.

Tax Free Cryptocurrency Transactions

Not all events will be viewed by the CRA as taxable disposals

  1. Buying Cryptocurrency: Buying cryptocurrencies on exchanges using CAD is completely tax free, you are simply acquiring an asset.
  1. HODLing: HODLing your cryptocurrency through several tax years is completely tax free, just keep your cost basis handy!
  1. Donating Cryptocurrency: Donating any amount of cryptocurrency to a registered Canadian charity is not classed as a disposal.
  1. Moving Cryptocurrency Between Wallets: Any movement, where your cryptocurrency does not get sold or move hands to someone else is tax free. You can move your crypto between exchanges without triggering a disposal.

Utilizing Cryptocurrency Losses

As the cryptocurrency market is constantly changing and investors are often speculating on several coins or tokens which will ultimately fail, it is important to capture any small losses that you may have made during the tax year. This action is called ‘Loss Harvesting’ and is a vital process that cryptocurrency investors should take before calculating their gain for the year. Loss Harvesting helps reduce your overall cryptocurrency gain by offsetting part of it with losses.

It is possible to completely write off any gains if your losses are large enough and even carry them forward to offset future gains.

Fortunately, the CRA stipulates that you are able to use any losses made on your cryptocurrency journey. However, similar to the gains, it's stated that you can only deduct 50% of your loss as a tax-deductible when filing your year end taxes. This means, even if you were to make a loss of $500, only $250 can be written off against your current tax liability.

Remember: When utilizing losses, only claim a loss to the threshold of your income allowance of $14,398 before carrying the losses forward with you into the next tax year.

Example:

Earlier, when Kate sold her bitcoin for $60,000, she forgot to include a loss she suffered trading a small market cap coin the year before. As she had made no gains in the previous year, the loss of $5,000 was brought forward to offset her current gain. 

As mentioned, Kate can only use 50% of the loss to offset current gains, giving her a ‘tax break’ of $2,500.

Kate had a taxable business income of $20,000, down to 17,500 with her allowed losses.

Using her tax rate of 20.06%, she will now only pay $3,587 in tax instead of $4,100, a massive saving for simply harvesting her losses made a long time ago.

Stolen or Lost Cryptocurrency

Although most agencies around the world are yet to release specific advice on lost or stolen cryptocurrency, the CRA does generally allow Canadian taxpayers to deduct any lost or stolen assets against their tax liability, which means the same rules should apply to cryptocurrency.

Based on the adjusted cost basis method, it’s presumed that only your cost basis can be deducted, instead of the fair market value at the time the crypto is lost or stolen.

Other Sources of Cryptocurrency Capital Gains

As we see greater and greater mainstream adoption of cryptocurrency, many other potential sources of income have become available for those dabbling in the space. A greater amount of sources means a greater amount of rules which the CRA must put in place for taxation. Lets see what CRA has said:

Airdrops:

Luckily, CRA does not count receiving airdrops as business income, but capital gains tax will need to be paid on the entire fair market value after disposing of the airdropped tokens, as CRA views airdropped tokens’ cost basis as 0.

CRA counts the cost basis of any airdropped token as the fair market value the day it was received.

Hard Forks: 

CRA does not give any specific advice for the taxation of forks. Similar to airdrops, business income will not be payable, but the entire proceeds of the airdropped tokens are subject to capital gains at.

Taxation for ICOs, NFTs and DAOs

NFTs (Non-fungible tokens)

With the historic rise of NFTs, or non-fungible tokens, it can become quite confusing knowing which events in the creation, buying and selling of NFTs cause what taxable events.Although, CRA has no specific guidance on how they expect NFTs to be taxed, we can infer based on the type of income or gain they create.

  1. Buying or Minting NFTs

If you are buying NFTs with fiat (CAD) there is no income tax, similar to buying cryptocurrency. If you buy NFTs with crypto, it is a crypto-to-crypto trade and taxable as a gain. (Gain on the cryptocurrency sold)

Minting NFTs is a tax free event.

  1. Creating NFTs

Treated as a business, creating NFTs carries income tax with it, as value is created and distributed when sold.

  1. Selling, Swapping or Gifting NFTs

Selling an NFT for fiat or cryptocurrency as well as swapping NFTs makes any gain made chargeable as a capital gain.

Gifting NFTs, unless to a registered charity, requires capital gains to be paid on any profit made.

DAOs (Decentralized Autonomous Organization)

At the heart of the crypto philosophy are DAOs, a completely decentralized organization with no central authority. 

As DAOs are not owned by anyone and cannot pay taxes by themselves, all the profits are funneled through to the investors. This means:

  • Income from DAOs is income tax
  • Gains made from the sale of any DAO tokens is capital gains

DAOs are not registered anywhere and fall under zero Canadian tax laws, which means CRA can only give guidance on how income and gains are treated and not actual participation in the DAO itself.

ICOs (Initial Coin Offering)

ICOs are the main way funds are raised for new cryptocurrency projects, the cryptocurrency version of an IPO. Investors often trade Bitcoin or Ethereum for the new projects coin, in expectation of a great future return. ICO investors often receive a large amount of coins of their initial investment. Investors base their judgment on whether a project is worth it or not via a whitepaper, a technical document that explains what the project hopes to achieve and it’s process.

Often with CRA, there is no solid advice:

  • For investors, it is assumed that only capital gains tax is payable if the ICOs coin gets sold for a profit. Capital gains tax may also be charged on the sale of the Bitcoin or Ethereum for the coins. (Fiat will be tax free)
  • For founders, income tax will be payable on any funds received from the ICO, as their created coin is technically worthless, with no fair market value to pull from as it has never been sold.
  • Capital gains tax will be payable when either their own coin is sold, or the Bitcoin/Ethereum received as funding.

Many ICO creators or founders will run into problems if they don’t anticipate the large potential tax return due from a successful ICO.

How Cryptocurrency Business Income is Taxed

The CRA is still yet to recognize specific guidelines for business income generating activities via cryptocurrency, mainly due to their adjusted cost basis method, giving most a cost basis of zero. However, some cryptocurrency business income is still taxable. 

Often, investors only engage with the buying and selling of cryptocurrency. However, there is a large underbelly of the cryptocurrency community which takes advantage of a whole range of methods which grant great opportunity for all in the cryptocurrency space, that would be unimaginable in today’s centralized, fiat climate.

A lot of these activities take place in the land of DeFi, or decentralized finance, where there is little to no regulation without rules set in stone. A trustless and permissionless system allows anyone to contribute to a liquidity pool, or receive an airdrop. DeFi does create a problem for the CRA when it comes to taxation, as the government is naturally centralized. Neglecting that, there are still some rules in place for investors, as most DeFi protocols are considered business activity by the CRA.

Airdrops

Behind the curve of many other countries, the CRA is unable to tax individuals for airdrop income. Only capital gains tax will be payable on the proceeds if sold, the ‘cost basis’ of an airdrop is zero, so tax is paid on all of the profit.

 Businesses that receive airdrops will need to pay income tax.

Staking

Staking allows users to put their cryptocurrency to work in the blockchain, consequently earning them passive income.The CRA recognizes staking as a business activity, utilizing a commercial activity for yourself. Staking clearly shows using your initial assets to ‘earn’ crypto, putting it subject to business income tax.

  • CRA expects any income from staking to be taxed at the fair market value on the date you received the business income.

Remember: Even though you will pay income tax on any staking income, CRA requires income tax to be paid on any gains made on the disposal of staking rewards. In this context, the ‘cost basis’ will also be the fair market value the date you received the staked rewards.

Although staking is subject to business income tax for almost all participants, it can be a great way to create passive income, leveraging your already existing portfolio.

Liquidity Pools

Such small advice has been given on liquidity pools by CRA, however, the new liquidity pool tokens we receive for providing our liquidity are subject to income tax and seen as ‘business income’.

However, as these DeFi protocols become more popular over time, we could see CRA reassess liquidity pools, like the UK did, by assuming a crypto-to-crypto trade has taken place when you initially provide liquidity as more and more liquidity pools are starting to provide their own token.

Mining

The CRA views crypto mining as two separate activities. Mining as a business and as an individual. Simply put, individual miners only pay capital gains tax when they dispose of their cryptocurrency, businesses pay income tax.

Hobby miners pay capital gains tax on their entire proceeds as the cost basis of their mined crypto is zero.

Business miners are required to keep track of their cost basis via either of the two methods:

  1. Annually valuing your entire crypto holding at ti’s fair market value.
  1. Use each asset at it’s acquisition cost

Play-to-Earn Crypto games

The CRA also recognizes many play-to-earn crypto games such as Axie Infinity that allow users to ‘earn’ income by playing or engaging in the content. This can even come in the form of watching to learn, or learn-to-earn like the Coinbase Learning Center.

As you are almost always providing a service for the earned income, the CRA treats it as business income and is required to be taxed at your federal tax rate.

How Is Your Crypto Business Income Taxed

Sadly, business income generated from cryptocurrency is completely taxable, unlike the 50% reduction given to crypto capital gains. As we have seen, most traditional income sources in crypto do not count as crypto income to CRA.

The value of any crypto business income is taken as the fair market value the day it was earned. Investors then need to apply their Federal and Provincial tax bracket to the earned income.

How is DeFi taxed?

The CRA has been very reluctant to recognize DeFi at all, so it is important to note that there is no clear guidance on how Canadian investors should pay income or capital gains tax on any DeFi Assets. The conscious investor should follow two simple rules:

  • Disposing, trading or gifting crypto will be seen as capital gain
  • Earning cryptocurrency, by providing a service, engagement or liquidity will be seen as business income

It’s important to note that most DeFi activities will be business income based, such as staking and liquidity pools, the main reason for DeFi for most.

It is unsure whether the CRA will ramp up and begin to set clear guidelines for the taxation of DeFi. Until then, we should look forward to countries and agencies with a better grasp on DeFi taxation to see what is to come for Canadian Investors.

What Records do the CRA want?

Now that you know how your cryptocurrency is going to be taxed, it’s important to know what records the CRA wants and needs to confirm those transactions. The CRA has made it clear that it requires all crypto investors to keep up to date and accurate records of their crypto transactions. This is required due to the fragility of centralized exchanges records, often getting deleted after a short period of time (3-6 months).

Because of this, CRA requires investors to keep up to six years of records.

CRA knows how the exchanges operate and rests the liability of collecting the transactions on the taxpayer.

The CRA expects meticulous detail in your records:

  • Dates of transactions
  • Any purchase of transfer receipt
  • The fair value of the transaction in CAD (time of transaction)
  • Exchange records
  • Your crypto wallet addresses
  • Brief description of transaction + other parties address.

Most of this extremely in-detail record keeping can shy investors away from cryptocurrency. However, there are many great softwares and accounting firms, such as MetaCounts, already out there which catre for almost all cost-basis methods, including Canada’s adjusted cost basis. 

Investors can simply sync their data between the exchange and the software using a self-generated API and securely transfer their trading data. This will help save an unforeseen amount of hours for the average investor. 

Investors with several Metamask wallets, for example, or DeFi wallets are able to manually sync their individual wallets to compile all their transactions.

Remember: Software tracking all your transactions is a great way to maximize your loss harvesting and stay tax compliant, consider using MetaCounts.

The Canadian Adjusted Cost Basis Method

The CRA requires investors to use their adjusted cost basis method when calculating any gains. The adjusted cost basis method takes into account the fair market value at the time of purchase and any reasonable expenses, such as transfer fees or any small exchange fees.

When selling, the adjusted cost base method uses this formula:

Cost basis - coins sold * average cost.

Here, the average cost has to be constantly updated by the investor to ensure they keep an accurate average cost of their crypto.

The Superficial Loss Rule

Now, to make things more complicated for investors, the CRA has put the superficial loss rule inplace to ensure investors are not manipulating their losses and can only claim losses under certain conditions.

Put simply, the CRA states that any capital losses which meet both requirements cannot be claimed as an offset.

  • You acquire identical cryptocurrency during the period beginning 30 days before and ending 30 days after the disposal.
  • You either owned or had a right to acquire the cryptocurrency at the end of that period

You can find more advice about the superficial loss rule here.

Calculating Cryptocurrency Taxes

As we spoke about before, it would be beneficial to use a service that helps reassure you that the right amount of tax is being paid and when, such as MetaCounts, which is a cryptocurrency accounting firm.

Unlike several other services, MetaCounts is an actual cryptocurrency accounting firm, focused completely on the cryptosphere with expertise in DeFi and NFTs and crypto taxes.

Remember: You SHOULD be claiming any losses available to reduce your crypto tax liability by as much as possible.

What you can do to Reduce Your Cryptocurrency Taxes

  1. HODL: The most bulletproof plan to ensure you pay no capital gains taxes on your crypto is to simply HODL. Invest in a project you are comfortable in HODLing for a long term such as blue-chip crypto’s Bitcoin or Ethereum and sit tight.
  1. Use Your Allowances: Making use of any personal allowances that you or your significant other may still have is vital to reducing your tax liability to as little as possible. Each person is granted a personal allowance annually, regardless if they are making normal income.
  1. Make a Donation: Donating your crypto to a Canadian charity is completely tax free.
  1. Utilizing Low Income Years: As Canadians do not receive a capital allowance, selling your cryptocurrency during a year of low personal income will allow you to utilize your personal allowance, or a lower Federal tax bracket more efficiently and help in reducing your tax liability. 

Why Choose MetaCounts

Unlike software which only provides basic crypto tax information, MetaCounts provides the full spectrum of need’s that any individual, or business, crypto investor needs to stay law-abiding and tax efficient.

Not only do we cover in-depth tax filings for all types of crypto income and gains, but we also ensure we actually plan your taxes to maximize savings in the coming years. 

On top of this, we provide in-depth crypto tax reports and return on investment analysis to maximize your earning potential and really put every dollar to work.

It’s time to stop speculating in the dark hoping to get lucky and dive deep into the analytics of what makes a successful crypto investor.

Conclusion

Paying taxes is never comfortable for anyone, but they are a necessary evil, even for crypto traders! Good news is, by following these guidelines you can reduce your tax liability as much as possible and follow our advice on when is the best time to sell, trade or buy cryptocurrency. As great as a completely decentralized currency would be, those wanting to use their cryptocurrency gains for real life purchases and investments require taxation. 

CRA has put stops in place to ensure crypto taxes are manageable, such as halving the capital gains tax payable. Paying taxes on your gains is inevitable, just make sure you are paying them as efficiently as possible, which is where firms like MetaCounts truly come into their own with their special use of Taxbotic, removing any crypto investors worries about correct compliance in an ever changing landscape, allowing them to focus on what matters.

Disclaimer: CRAs relationship with Cryptocurrency

Although CRA continues to slowly create guidelines for Canadians investing in cryptocurrency, they are still way behind several other developed countries when it comes to the rules surrounding taxation. Many DeFi protocols, such as yield farming and staking are yet to receive proper guidance from CRA. We should expect to see the number of guidelines rapidly increase as Canadian investors call for them but until then, crypto investors have to take positions that may or may not be accepted by CRA. 

*Opinions are for discussion purposes only. This does not represent the views of MetaCounts Cashflow Inc. or its affiliates. Furthermore, this does not constitute legal, accounting, or tax advice of any kind and should not be relied upon as such.

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