A cost basis is used to calculate what the potential gain of a capital asset should be based on. To make it complicated, countries often have varying different ways to calculate a cost basis, especially for cryptocurrencies, which makes it complicated for investors. Cost basis’ can drastically change the amount of tax an investor pays on their capital gains.
Let’s take a look at CRA's cost basis for crypto assets:
Adjusted Cost Basis
CRA requires all investors to use their adjusted cost basis method when calculating capital gains on any crypto assets. Gains can occur when investors participate in what CRA views as a taxable event which includes:
- Selling, gifting or trading cryptocurrency
- Paying for services or products with cryptocurrency
The adjusted cost basis requires investors to constantly keep track of their total holdings for each crypto asset and their total purchase price.
So, calculating your cost basis follows this simple formula:
Cost basis = amount of coins sold * average cost of coins
This may seem like an incredibly easy way to calculate your cost basis, but CRA has put in rules such as the superficial loss rule to ensure investors are not abusing capital losses to minimize their tax liability. Capital losses can be used to offset gains indefinitely for Canadian investors.
To calculate your average cost of coins purchased you need to document each separate purchase of your chosen cryptocurrency.
If you purchase 1 Bitcoin for 50,000, and 1 Bitcoin for 60,000 your average cost of coins calculation will be as follows:
Total price paid (110,000) divided by total bitcoin bought (2) = (110,000 / 2) = 55,000 Average entry price.
John recently bought 1 Bitcoin near its all time high of 69,000. Bitcoin is now sitting at 50,000, giving you a paper loss of 19,000.
You may think to yourself, why shouldn't I sell my crypto assets at a loss to claim the capital losses and buy the bitcoin back for a similar price a few days later?
This is where the superficial loss rule kicks in to stop you!
The superficial loss rule is there to stop investors abusing the system and will be active when two conditions stipulated by CRA are met:
- You buy crypto assets identical to the ones sold 30 days before or 30 days after the original disposal
- At the end of the period, you owned or had the right to own that cryptocurrency (Right to own could mean assets locked in a stake or liquidity pool, for example).
If both conditions are met, capital losses cannot be claimed on those crypto assets!
These conditions mean that a significant price difference is most likely to have happened between the sale of the crypto assets and the re-purchase of them.
John decides to sell his Bitcoin he purchased for $69,000 at $50,000, in fear the price will continue to decrease further.
20 Days later, Bitcoin has stagnated in price and John is getting anxious, deciding to buy back his Bitcoin for the same price he sold it at.
John has realized he has made a paper loss of 19,000 and attempts to claim it against his future profits.
Unfortunately, his loss is nullified by CRAs superficial loss rule, as he bought his Bitcoin within 30 days of disposing of it.
Although CRA is behind on offering advice, calculating your cost basis for hundreds if not thousands of transactions can be time consuming and tricky, which is where MetaCounts service comes to the fore. It's important that as an investor you are keeping track of all your trades and transactions to constantly update your cost basis on each crypto asset you own.
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.