Crypto Credit Card made it to Canada! How does taxation work on it?

Crypto credit cards are finally available in Canada! Hailed as a possible answer to the current state of the banking industry, it has been garnering a lot of attention from crypto enthusiasts and Canadian citizens alike. The question on everyone’s minds? How does taxation work with this new type of currency? What most people do not realize is that cryptocurrency can be taxed just like any other currency as we can recall in our previous article.  A crypto credit card is an option for those who want to use their cryptocurrencies as a form of payment. However, it does come with some risks – the most notable being volatility. Crypto prices have been known to fluctuate drastically within short periods of time. The cryptocurrency market has also had its fair share of security breaches where people have lost significant amounts of money due to hacking attacks on centralized exchanges and wallets. Therefore, if you are looking into getting one, make sure you do your research first so that you do not end up regretting it.

To begin, it is crucial to understand that cryptocurrency “credit cards” are not actually credit cards. You do not need to borrow money, you do not have a credit line, and your crypto card has no impact on your credit score.

They are more akin to prepaid cards. You put money on them from your cryptocurrency wallet, and your card converts it to Canadian dollars. You can then use your card to make regular purchases, and your crypto card may earn incentives in some circumstances.

How does taxation work in a Crypto Credit Card?

Remember that using crypto to purchase goods or services triggers a taxable event. The difference between your cryptocurrency’s cost basis (the price at which you purchased it) and its market value at the time of acquisition will be taxed by the CRA at 50%.

As an example, suppose you purchased Bitcoin in 2017 for $10,000, transaction fees, brokerage fees, and commissions included. You noticed that your Bitcoin holdings had increased to $60,000 this year and chose to put that money toward a Tesla. The difference between the cost basis ($10,000) and the market value ($60,000) in this situation is $50,000 which is your total capital gain. You will be taxed for 50% of your total capital gain and in this case, it is amounting to $25,000, the other half will be for you to keep tax-free.

However, tax-related activities are not confined to large transactions. You will have to pay taxes on everything from transportation to coffee to groceries to snacks. you are still triggering tax events even though you are not technically selling your crypto (you are trading it). You are also theoretically dodging taxation if you do not pay taxes on these purchases. While I doubt the CRA will pursue legal action against you for a single $5 cup of coffee, they may do so if your modest purchases build up to a substantial sum.

Crypto Rewards

Crypto rewards are also subject to taxes. Some crypto cards, like cashback credit cards, will allow you to earn money at a specified rate, such as 1% or 2%. For example, if you spend $100, you will receive a $1 refund. This $1 can then be used to purchase crypto on the card’s trading platform.

Suppose you have accumulated $1,000 in cashback and decided to invest $1,000 in Bitcoin. You decide to acquire a Peloton bike after your $1,000 investment has grown to $2,500. The difference between the cost basis ($1,000) and the market value ($2,500), is $1,500 exactly like our Tesla example, 50% of $1,500 is your taxed capital gain which is $750. It is like you will be rewarded for spending money, but you will also be subject to capital gains taxes on whatever you make.

If you are interested in using your cryptocurrency to make purchases but do not want the trouble of converting it into Canadian dollars first, then a crypto credit card is an option for you. However, if this type of currency makes up the majority of all of your income and assets, be warned that there may be some implications on how much tax you owe at the end of the year. Reach out to our team today so we could help plan accordingly!