Cryptocurrency Tax In Canada
The argument that taxes should not necessarily drive your investment decisions may hold water. However, it is essential to consider the tax policy of your country before embarking on any type of investment. If you are careless, taxes are capable of reducing your annual investment returns, thus jeopardizing your long-term goals. Many countries implement cryptocurrency tax laws to collect taxes from citizens who trade these digital assets.
Canada is one of such nations with a crypto tax policy that states the profits realized from cryptocurrency are taxable in the year it is earned. Therefore, it is pertinent that Canadian crypto investors understand and comply with Canadian crypto tax policies.
CRA Guide on Cryptocurrency Tax in Canada
The Canada Revenue Agency (CRA) – the government body responsible for collecting taxes, has concluded that cryptocurrencies fail to meet the definition of money or currency. To the CRA, cryptos are commodities, just like oil or gold. Therefore, the tax rules that apply to barter deals also apply to cryptocurrencies.
This implies that cryptocurrencies fall under the purposes of the Income Tax Act, which means that income made from crypto transactions gets treated as either business income or capital gain, depending on the situation. For instance, the Canadian crypto tax policy states that buying/selling cryptocurrencies fall under capital gain tax. However, using crypto to purchase goods or services falls under income tax. Taxpayers have the responsibility of determining if their cryptocurrency activities fall under income or capital gain. This is especially true since not all cryptocurrency transactions are for business purposes.
According to the Canada Revenue Agency (CRA), income for the year includes all capital gains from the sale of cryptocurrency. Still, only half of the capital gain is subject to tax. In a basic sense, this means that only 50% of your crypto gains are added to your income and taxed at your marginal tax rate. Therefore, taxing doesn’t occur on the total value of your crypto holding but a percentage of your investment gains.
Are there any Cryptocurrency Tax Breaks in Canada?
Yes, there are cryptocurrency tax breaks in Canada.
As you may know, a tax break entails a reduction in your tax liability. Tax breaks are available in three forms: tax deductions, tax credits, and tax exemptions. In Canada, a cryptocurrency tax break reduces the amount of tax that crypto traders have to pay. Crypto tax breaks in Canada are only available for individuals whose earnings fall under capital gains.
However, getting the “capital gain” treatment can be problematic. This is because the CRA investigates crypto tax filings. If you file your tax as capital gains and the CRA investigates and determines your crypto earnings fall under business income, you will get slammed with tax negligence penalties. It is always advisable to have a good lawyer look at your portfolio and give you appropriate tax filing advice before proceeding with anything.
How do I Keep Trading Records for my Cryptocurrency Taxes?
As a crypto trader, you are responsible for maintaining the essential records for your cryptocurrency transactions. Keeping accurate trading records requires an understanding of cryptocurrency tax laws and taxable transactions.
The following crypto transactions are taxable according to Canadian law:
- Gifting or selling cryptocurrency.
- Exchanging or trading cryptocurrencies.
- Converting cryptocurrency to fiat, e.g., converting Bitcoin to Canadian dollars.
- Buying or selling goods/services with cryptocurrencies.
To prepare for tax day, you should endeavor to maintain the following records of your cryptocurrency transactions:
- The date of the transactions
- The receipts of purchase or transfer of cryptocurrency
- The value of the cryptocurrency in Canadian dollars at the time of the transaction
- The digital wallet records and cryptocurrency addresses
- A description of the transaction and the other party, for instance, a cryptocurrency address
- The exchange records
- Accounting and legal costs
- The software costs that are related to managing your tax affairs.
Can I Trade Cryptocurrency in My RRSP or TFSA Accounts?
Thanks to Bitcoin ETFs, you can trade Bitcoin in your RRSP or TFSA accounts, just like stock. The Registered Retired Saving Plans (RRSP) and Tax-Free Savings Accounts (TFSA) are forms of brokerage accounts for investors in Canada that allow them to access the Toronto Stock Exchange.
There is a growing interest in trading Bitcoin ETFs on RRSP or TFSA accounts because these accounts are tax-sheltered. Investors using TFSA or RRSP do not have to claim Bitcoin on their taxes because the Bitcoin ETF provides a legal way to limit or eliminate crypto taxes if held in these accounts. So, yes, if you wish to avoid tax levies, you can save your crypto as an ETF utilizing any of these brokerage accounts. However, note that only Bitcoin and Ethereum ETFs are currently available, making them the only cryptos used in this manner for now.
What if I Don’t Report my Cryptocurrency Capital Gains to CRA?
A big shock came in the summer of 2018 when an international coalition of tax administrators — the Canada Revenue Agency (CRA) and the United States Internal Revenue Service (IRS) — formed a tax coalition to expose and prosecute cryptocurrency users who evaded their tax obligations. They claimed to have fine-tuned strategies designed to help them identify cryptocurrency users liable for a tax audit or those guilty of tax evasion.
Failure to report your crypto income is akin to refusing to notify the CRA of any other type of income. This is a crime, and there are severe consequences like tax evasion charges. Considering Canada has a well-established agency laden with the task of ensuring full compliance to these rules, it is always better to abide by the law.
This blog is for informational purposes only.
This does not imply or suggest investment in cryptocurrencies.
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