CRA considers cryptocurrency like a commodity for tax purposes. Any income from transactions involving cryptocurrency is treated as business income or capital gain, depending on circumstances like frequency of transaction, nature of business, intention at the time of purchase, commercial activity, etc. Likewise, any losses from such transactions are also treated as a business loss or capital loss. The business income is 100% taxable whereas capital gains are 50% taxable.
Holding or possessing a cryptocurrency is not taxable. Disposition of cryptocurrency leads to taxable events which includes:
• Selling or gifting
• Trading or exchanging one for another
• Using to buy goods and services
• Converting to a government-issued currency like Canadian dollars
Filing your crypto tax reports
The following steps you need to undertake to file your crypto taxes correctly:
1. Download and keep a record of transactions (including transaction dates, buy & sell values, number of units traded/ bought/ sold, etc.) from your accounts at different exchanges and private wallets for the assessment year as well as all previous years to help you calculate your cost basis correctly (CRA recommends keeping records for up to 6 years from the end of the last tax year).
2. Make sure the withdrawals from one account and a deposit into another account are marked as Transfers to avoid paying double tax. The moving of cryptocurrency from one account to another is not taxable.
3. Remember that crypto to crypto trades are also taxable. This means you need to assign market rates to all the crypto trades and calculate the sales proceeds and cost basis accordingly.
4. Calculate your capital gains using the Adjusted Cost Basis (ACB) method to file your return.
Tax deductions for individuals
Taxable income can be reduced by claiming any of the following expenses:
• Fees paid for professional investment advice
• Crypto donations to charities
Fees for buying and selling cryptocurrency are not tax-deductible, as they are used to calculate the adjusted cost base of assets which ultimately leads to a reduction in taxable capital gain.
Tax deductions for businesses
The following deductions can be claimed on the business tax return:
• Gross salaries paid to employees (excluding subcontracts, owners’ salaries)
• Payroll deductions like CPP, EI
• Fees paid to professionals and accountants
• Meals and entertainment expense
How does the GST/HST apply to cryptocurrency?
Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange. If your business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction. Keep all records that show how you calculated the fair market value.
What if you don’t report gains on cryptocurrency?
Not reporting the gains on cryptocurrency is called Tax evasion, which is fraud and counts as breaking the law. CRA could charge penalties and interest on a later date. You can avoid prosecution and penalties by reporting through CRA’s Voluntary Disclosure Program.
For more help in correctly disclosing your crypto transactions on tax returns, please reach out to IDM Professional Corporation CPA.
