It’s that time of the year again. Regardless of who you may be – whether you’re an investor or a business – there are some important facets about cryptocurrency that you need to know when tackling taxation for your particular venture.
This article will aim to educate on what constitutes taxation for cryptocurrency, multiple scenarios, and how the Capital Gains Tax applies to you – among others. Note: this is not tax advice, this article is purely for educational purposes only. These tools are here for your and your accountant’s convenience, but may not always be suitable for your personal circumstances. It is always best to consult a tax professional if you are unsure about anything.
You can calculate your crypto taxes with Koinly. Read until the end for a surprise discount code! Now, let’s dive into crypto tax in Canada.
Is cryptocurrency taxable in Canada?
The short answer – yes. You will need to pay a tax on cryptocurrency gains within Canada. Common confusion often arises from determining the need to pay business income tax or the aforementioned Capital Gains Tax.
The Canada Revenue Agency (CRA) has specified that cryptocurrency is a digital asset. While cryptocurrency can be used to facilitate trades or payment services, it is not technically legal tender and the CRA does not consider it as such. Consequently, the CRA treats cryptocurrency as a commodity as outlined in the Income Tax Act in 2013.
Can I be taxed for holding crypto?
Since cryptocurrency is treated as a commodity, you do not have to pay taxes for buying and storing them in your cryptocurrency wallet. Simply holding crypto does not incur any taxation, nor does buying crypto off your favourite exchange or trading platform. This creates an interesting situation when you use cryptocurrency to purchase goods or services as cryptocurrency is considered a commodity. When you buy something with crypto, the CRA considers it a trade between two items – or more simply, a barter trade. The Income Tax Act delegates that any bartered transactions could have income tax implications. More on this later.
What are the activities that may trigger a crypto tax in Canada?
While holding crypto does not constitute any taxation, doing any of the following leads to tax liability:
- Exchanging cryptocurrency for another type of cryptocurrency (including swaps, exchanges, peer-to-peer trades)
- Selling cryptocurrency to another party
- Converting cryptocurrency into fiat currency
- Using cryptocurrency to pay for goods and services (barter trade)
- Giving cryptocurrency as a gift
These are the multitude of scenarios where taxation can occur on cryptocurrency. As a general rule of thumb, if you are incurring profits from a crypto transaction – it will be treated as either a capital gain or business income. Likewise, if you incur a loss, it will be considered either a capital loss or business loss. While you, the taxpayer, are obligated to outline transactions that might lead to capital gain or income, not every transaction counts as a business activity.
It is important to note that if your profits are taxed as personal capital gain, only half of your profits are subject to taxation, whereas income tax is applied to the entirety of profits.
Capital Gains and Business Income
Differentiating between the two can be confusing. The CRA states that they consider a transaction a capital gain or business income on a case-by-case basis. An individual transaction could be considered business income, whereas other transactions by the same party may be considered capital gain.
What is capital gain?
You are required to pay capital gains tax. The Capital Gains Tax is the most common type of cryptocurrency tax. A capital gain is the difference in value from when you bought or acquired your cryptocurrency compared to when you disposed of it, either by selling, exchanging, spending, or gifting it. If the opposite were to happen, i.e., the disposed value is lower than when you bought the cryptocurrency, then you can write the difference off as a capital loss, potentially reducing the amount of income tax you owe.
Calculating Capital Gain Tax
A simplified scenario where you would pay Capital Gain Tax is this: if you started off with $5,000 of crypto at the beginning of the year and, by the end of the year, it appreciated to $11,000. The $6,000 difference after selling it is what you would consider your capital gain. As Capital Gains Tax is only applicable to 50% of your total profit, then $3,000 ($6,000 x 0.5 = $3,000) is the taxable capital gain for the year. That would be the amount needed to be included in your personal income tax return.
The same rule will also apply to a capital loss, as you can only offset half your net capital loss in a given tax year. If you’ve done this and incurred further losses, they can be carried forward to future financial years to offset against future gains.
Generally, you would need to first find your cost basis, or how much it cost you to buy the specified crypto asset plus any additional fees. If you conducted the transaction through an exchange or trading platform, then it would be as simple as checking your trading history. Canada uses the adjusted cost basis method (ACB). This allows you to amend your cost basis to reflect how much the asset actually cost you – meaning you can include transactions fees, exchange fees, or even gas fees. This also means that if you acquired your crypto asset for free, then the adjusted cost base method will determine that it cost you nothing to acquire your crypto, meaning that all of your profits would be subject to Capital Gains Tax.
Since there is no specific Capital Gains Tax rate, the tax percentage is taxed at the same rate as your Federal Income Tax rate plus your Provincial Income Tax rate. While this might seem high, remember that you are only taxed on 50% of your capital gains. When it is time to file your capital gains taxes, look for the Schedule 3 tax form for capital gains or losses.
What is business income?
The CRA considers business income and capital gains on a case-by-case basis. Therefore, it is tricky to figure out exactly what your profits might end up being considered as. The CRA has given general guidance on this, however they state the following as common signs that you could have business income:
- Activities are being carried for commercial reasons and in a commercially viable way
- You are promoting a product or service
- There is intent to gain profit, even if profit is not realized in the short term
- Your crypto activities are regular or repetitive.
The CRA’s own example of business income is that of an investor who trades crypto on a regular basis and makes a profit of $40,000 through active cryptocurrency trading.
The more active a trader you are – the more profits you gain. This in turn increases the chances of your profits being considered business income rather than capital gain, as the CRA considers day trading to be a commercial venture.
Along with investing and trading, some other common crypto-related activities that are considered business activities include:
- Receiving payment in crypto
- Mining crypto
- Rewards from staking
- Referral bonuses
- Selling an NFT you have created
Decentralized finance (DeFi) has also brought with it a slew of new ways for investors to make profit. According to the guidelines mentioned above, DeFi transactions could also be classified as business income. While the CRA has yet to release any strict guidelines regarding DeFi transactions, activities such as yield farming, earning crypto rewards, or even rewards from play-to-earn games like Axie Infinity could be subject to business income tax.
How would I know if my transaction is considered a capital gain or not?
As outlined in last year’s tax guide, there are some generalized factors that could determine whether or not capital gains and losses are considered capital gains or business income:
- Transaction frequency: If the party has a history of frequently trading cryptocurrency
- Ownership period: If the crypto has been kept for a short or long period of time
- Knowledge: If the party is knowledgeable about crypto markets
- Relationship to work: If the party’s crypto transactions are integral part of their business
- Time spent: If the party spends a significant portion of their time studying crypto and investigating the market
- Financing: If the party has accrued crypto through a form of debt
- Advertising: If the party actively advertises that they are willing to purchase crypto
Of course, it is always best to consult a tax professional if you are unsure where your realized profits may lie.
Does GST/HST apply to me?
The CRA does not consider cryptocurrency legal tender and instead considers it a commodity. Hence, when you exchange cryptocurrency for goods and services, this exchange is considered a barter transaction. Like we mentioned earlier, barter transactions fall within the Income Tax Act. If you earn cryptocurrency from selling a good or a service then you have an obligation to collect or remit the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST), depending on your province of residence.
Liability for the tax falls on the purchaser and the obligation to collect and remit taxes falls on the seller/vendor. When accepting crypto as a payment on a taxable good or service, the GST/HST is calculated based on the fair market value of the consideration received for the good or service.
When paying for an item with cryptocurrency, the transaction combines elements of everything discussed in this article so far. If a vendor in Toronto accepts payment for an item in Bitcoin, the vendor needs to determine the fair market value of both cryptocurrency and the item sold – in Canadian dollars at the time of the transaction. The value of the item must then be included in the vendor’s HST return as revenue in CAD with the applicable percentage of HST. The buyer then has the obligation of reporting either income or a capital gain/loss upon the disposition of their cryptocurrency.
Are NFTs Taxable?
They are, but the type of tax depends on how you are profiting from an NFT. As mentioned above, if you create an NFT and you sell it, any profits that you incur from the sale of your NFT will be considered business income that is liable to taxation. If you buy an NFT and it appreciates in value upon selling it back to the market, it is treated as an asset – therefore liable to Capital Gains Tax.
Keep in mind that because it is a crypto asset, some of the same rules apply to an NFT that would to cryptocurrency:
- Buying, minting, or holding an NFT does not trigger tax liability – unless you buy it with cryptocurrency – which would incur Capital Gains Tax on the difference between the assets if there were a profit.
- Cashing out an NFT for cryptocurrency or fiat currency is liable to Capital Gains Tax
- Swapping an NFT for another NFT; if there is a profit made between the exchange, it is also liable to Capital Gains Tax
- Gifting an NFT incurs Capital Gains Tax if there was an appreciation of the asset from when you acquired it to when you gifted it. Unless it is gifted to a charity, in which case would be tax-exempt.
What would happen if my crypto income were not reported?
Like with any forms of income, you need to be vigilant and cognizant of your transactions since not reporting income, including that earned from cryptocurrency, is illegal. A responsible investor knows that tax evasion is a serious violation and failing to provide a comprehensive report on your capital gains and losses could lead to severe consequences. At the very least, your interest on your taxes could be assessed and charged a 50% gross negligence penalty. At worst, you could see jail time.
Some things you should keep in mind when reporting your taxes:
- Time is a major factor in determining whether your trades can be assessed as capital gain or business income. Be aware of the frequency of your transactions so that you can make an educated estimate on whether or not your trades can be treated as a capital gain.
- The CRA can and will track cryptocurrency transactions. The pseudonymous nature of crypto may lull an investor into thinking that their transactions are hidden, but the CRA issued a statement saying that they are very active in pursuing cases of non-compliance. The CRA has a legal authority to access personal records from cryptocurrency exchanges and trading platforms.
- The law expects you to keep extensive records of your trades. If you haven’t already started doing this, it is extremely likely the exchange or trading platform you are active on can provide you with a detailed transaction history of all your trades.
What should I be keeping record of?
As per the CRA, you are expected to maintain the following records on your cryptocurrency transactions:
- The date of your transactions
- Receipts of any purchase or transfer of cryptocurrency
- The fair market value of the cryptocurrency at the time of the transaction
- Cryptocurrency wallet records and addresses
- Descriptions of the transactions and their parties involved
- The exchange records of the party
- Any accounting and legal costs
- The software costs related to managing your taxes
Exporting your VirgoCX transaction report
VirgoCX provides an easy way to manage all these records. If you have regularly traded on our platform, simply export your VirgoCX transaction report by following these instructions (currently available to desktop PC users):
- Login into your VirgoCX account on our website
- Click Data Export on the left navigation bar
- To file your cryptocurrency taxes, you will need to export your full activities history from VirgoCX.
- To check your records on the amount of fiat or your cryptocurrency deposit/withdrawal history, go to Fund and select either Cryptocurrency or Fiat currency.
- For fiat currency fund history, click Fiat Currency. Select ALL for both Type and Assets.
- If you are filing your tax for the year 2021 only, then Start Date should be January 1, 2021, and for End Date December 31, 2021.
- If you are filing for previous years, you may select the appropriate start and end dates for those years.
- After selecting your date range, click Export to get your reports.
For a detailed tutorial, visit our support article here.
If you would like to see your full transaction history:
- Select ALL for Pair, Direction and Order Type
- If you are filing your tax for the year 2021 only, then Start Date should be January 1, 2021, and for End Date December 31, 2021.
- If you are filing for previous years, you may select the appropriate start and end dates for those years.
- Click Export to get your report.
Once you have these reports, provide them to a tax attorney or upload them onto your tax software of choice. Please note that the tax deadline falls on a weekend this year. Therefore, the last day you can file your taxes is May 2, 2022.
Generating your crypto tax report with software
Third-party crypto tax software like Koinly can help you generate your tax report. Use code VIRGOCX25 and get 15% off select tax plans.
Please note that uploading your fiat currency funds file to Koinly is not required. A Tax Report will still be generated with just the transaction history CSV file and the cryptocurrency funds file. However, uploading the fiat currency funds file will ensure fiat balances match and may be easier to read your VirgoCX data.
For a detailed tutorial on how to use Koinly as a VirgoCX user, click here.
Conclusion
We hope this article cleared up any uncertainties that arise when dealing with cryptocurrency taxes. If you are a serious investor, then you must ensure that you understand the rules surrounding cryptocurrency taxation, as ambiguous as some of them may be. If you are ever in doubt, we highly recommend consulting a tax professional for advice.
Disclaimer: No Investment Advice The contents of this article are for informational purposes only and are not intended as, and shall not be understood or construed as, investment advice, financial advice or trading advice. There are substantial risks associated with the trading of cryptocurrencies and you should consult with a licensed financial advisor prior to making any trading or investment decisions. Content Not Warranted The contents of this article are provided “as is” and without warranties of any kind. You bear all risks associated with the use of the content provided including without limitation, any reliance on the accuracy, completeness or usefulness of any content available within this article.
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