Stablecoins are becoming more and more prominent in the crypto market as individual investors and big corporations try to avoid volatility of the crypto market. Total transaction volume of stablecoins in 2021 was over $4 Trillion (USD). Although the most popular stablecoins are linked to the value of one US dollar, they are classified as cryptocurrency and not as fiat. This means trades from cryptocurrencies into stablecoins in most cases are deemed as disposals. So, let’s take a deeper look into how stablecoins are taxed by CRA.
What is a Stablecoin?
Stablecoins are cryptocurrencies that track the value of an external currency or commodity, such as the US dollar. They are designed to keep a constant value and allow investors to hold some of their cryptocurrency in non-volatile assets.
How does the CRA tax Stablecoins?
Stablecoins are considered just another crypto asset which means they share the same taxable events as traditional cryptocurrencies such as ETH and BTC.
Taxable events include:
- Trading Crypto for Stablecoins
- Receiving Stablecoins as income
- Staking Stablecoins for rewards
- Paying for goods or services with Stablecoins
As stablecoins are not traditional cryptocurrencies and they derive value from an underlying, you rarely make any ‘gains’ on them as the cost basis will always stay the same. Therefore, taxable events occur when you trade your other cryptocurrency for altcoins. The gain made selling the other cryptocurrency will be taxable.
Remember: There may be instances where your crypto-to-stablecoin trade creates zero capital gains or losses, as they were traded in quick succession.
Sally bought 1 Btc at the start of 2021 for $30,000 and decided to sell it one year later at the start of 2022 for $40,000. The most common pair to sell Bitcoin would be BTC/USDT (A cryptocurrency tethered to the US dollar)
Sally receives $40,000 in USDT stablecoins, making a gain of $10,000.
Only 50% of her gain is taxable by CRA which means she will pay capital gains tax on $5,000.
Here, the stablecoins are simply acting as a store of value for Sally until she decides to either cash out or buy another cryptocurrency. Either action will not trigger any other taxable events, as no losses or gains would accrue as stable coins don’t move in value.
Investors are now commonly using Stablecoins for staking protocols, where they will receive rewards, usually in the cryptocurrency staked in return for their liquidity.
As the investor is providing a service for their cryptocurrency, the new Stablecoins will be taxed as income. Although income tax will be paid on any Stablecoins received, when they are traded for either fiat or another cryptocurrency, no capital gains tax will accrue.
Tax Free Stablecoin Events
- Sending stablecoins between wallets
- HODLing your stablecoins
- Trading Fiat for Stablecoins, or Stablecoins for Fiat
Stablecoins have become a great way to reduce risk at times of great volatility in the crypto markets. Now that Stablecoins allow investors to earn interest, they are a great store of value and provide much needed diversity in crypto portfolios.
Disclaimer: CRAs relationship with Cryptocurrency
Although CRA continues to slowly create guidelines for Canadians investing in cryptocurrency, they are still way behind 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 guidelines rapidly increase as Canadian investors call for them but until then, we have to work with what is available.
*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.