Even if you just buy, trade and sell crypto as an investment, the CRA may still view your income as business income—especially if this is something you do regularly for profit.
Some of the factors the CRA considers in determining whether investment gains count as business income include:
- Frequency of work
- How long are goods kept?
- Purpose when buying goods
- The amount of time spent on this task
- The level of knowledge required to perform the tasks
“Identifying your income as business income or capital gains is probably the most important reporting decision when it comes to cryptocurrency,” said Riley Storozuk, manager of advanced planning at IG Wealth Management in Winnipeg. If you're not sure whether your crypto income is business profit or capital gain—or how to get crypto tax—consult a tax professional.
How is crypto taxed in Canada?
As with other types of capital investments, you only report gains or losses in the tax year you take them out—in other words, when you withdraw money or trade your assets. Therefore, if you buy and hold cryptocurrency, it is not a taxable event. It's the same when you send crypto from one to another, assuming both wallets are yours. “That's the only major crypto transaction that can be taxed,” Storozuk said.
All other crypto transactions, including trading one cryptocurrency for another, withdrawing your coins, buying goods or services, or donating crypto to charities, friends or family, are taxable events. Any increase in the value of your crypto between the time you received it and when you lost it is capital gain (or business income, as defined above); any depreciation is a loss of capital (or loss of business income).
As for crypto ETFs, which hold crypto coins or shares of cryptocurrency-related companies, they follow the securities tax rules. If you hold crypto ETFs in a registered account, such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA), however, their growth is tax-sheltered.
Tips for keeping Crypto records
You must keep detailed records of all your crypto activity for six years, as the CRA can request to see it at any time. For each transaction, enter the date and description (eg, purchase, transfer or trade), the type of cryptocurrency and its value at that time. (See the CRA's list of crypto records you must keep, including costs related to crypto mining.)
“If you're using a coin-based exchange, you should be able to pull all that information by looking at your blockchain ledger,” Maneisha said. If you use multiple exchanges—which makes it difficult to track all your activity—you can use an app like Crypto Tax Calculator to aggregate the data, he said.
Working with a tax professional can help ensure that the tax treatment of your transaction is calculated correctly and the positions you take make sense, says Maneisha. “This is very useful in the event of an audit or audit by the CRA.”
How to report crypto on your income tax return
If you have determined that your crypto income is considered business income, you will need to file form T-2125, Statement of Business or Professional Activities. You may want to consult a tax professional, too—if you have a crypto business, you should be able to deduct various business expenses, such as subscriptions, memberships, your internet connection and home office related expenses. . Maneisha says: “Only the business part can be deducted, not the personal use parts.”
If your business income from crypto (after expenses) is negative, it is considered a non-cash loss, which can be deducted from any other sources of income you had that year (including employment or investment income) to reduce your taxes. If you don't have enough total cash to use the loss deduction, you can carry back non-cash losses for up to three years and use them on prior years' tax returns, or carry them forward 20 years to reduce them. your future taxable income.
Capital gains or losses are reported on Schedule 3 of your income tax return. Remember that, as with other investments, capital losses can only be used to offset capital gains. Those benefits should not come from other cryptocurrencies. “You can reap losses in one sector to offset gains in another,” Storozuk said.
Finally, be aware of the rule of superficial losses, also known as the 30-day rule. “If you buy a crypto-or a stock-and sell it at a loss, and you, or someone close to you, like your spouse, buy it again within 30 days, then it's not considered a loss for tax purposes,” Maneisha said.
Is there a way to shelter crypto money from income tax?
In short, no. “You cannot hold cryptocurrencies in tax-sheltered registered accounts, such as RRSPs and TFSAs,” Maneisha said. If you want to speculate on crypto markets within such accounts, you can choose crypto ETFs and other related investments instead.
Are NFTs taxable, too?
Yes, non-few tokens (NFTs) are taxable, and the CRA will consider the same factors that they do when evaluating crypto activity. Also, keep detailed records of your transactions and contact a tax professional if you need guidance.
If you have never reported your crypto income to the CRA, you may find yourself subject to unpaid taxes, penalties and/or interest on your capital or business profits. Voluntary preparation of your tax affairs may help you avoid or reduce these costs.
One last thing to note as you prepare your tax return: The CRA will not accept payment in cryptocurrency. So, if you owe taxes this year, make sure you have enough cash to cover your payment. “That has come as a shock to many people I talk to who have all their wealth/liquidity tied up in crypto,” Maneisha said. “They didn't see that they would have to spend money to pay taxes.”
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