Cryptocurrencies have become a focal point for tax agencies around the world. While the regulations remain in flux, crypto traders, investors and consumers should ensure that they're following the rules to avoid fines and penalties. Canada may not be cracking down as much as many other countries, but that doesn't mean that it's okay to omit crypto from your taxes.
Let's take a look at how the Canada Revenue Agency (CRA) treats tax on crypto in Canada and how traders and investors can ensure that they are compliant with the rules.
Taxes on Crypto: Canada Edition
The Canada Revenue Agency treats crypto as a commodity for the purposes of the Income Tax Act. As with the United States' Internal Revenue Service (IRS), any income from transactions is treated as business income or capital gains depending on the circumstances and the actual tax paid depends on each individual's tax bracket and other details.
Any cryptocurrency losses can be used to offset capital gains and lower income. If there aren’t any capital gains to offset, taxpayers can carry losses forward or backward to apply them to different years’ returns. It may also be possible to harvest capital losses by selling losing positions during the year and then replacing them later on.
The gains or losses must be reported on the Income Tax and Benefit Return and/or on Schedule 3. Most people must file their tax returns by April 30, 2020, although self-employed individuals have until June 15, 2020. The ongoing COVID-19 outbreak may also change the amount of time that most people have to file their taxes.
Calculating Cost Basis
The amount of business income or capital gain depends on the cost basis and fair market value of the crypto that you sell or trade.
According to the CRA, the fair market value is the highest price, expressed in dollars, that a willing buyer and a willing seller would agree to in an open and unrestricted market. These prices may be sourced from the same exchange broker that you used to make the transaction or the average of midday values across a number of high-volume exchange brokers. The CRA cautions taxpayers to use the same method over time when calculating the fair market value. In other words, you should use different methods and cherry-pick the lowest fair market value in order to minimize taxes. The good news is that most crypto exchanges provide the fair market value as part of their reporting to help simplify taxes.
If you receive crypto from a hard fork or airdrop, you do not owe any tax until you sell the asset. The cost basis is zero since you did not pay anything to acquire it, which means that the entire sale proceeds are taxable. Similarly, coins received through an initial coin offering (ICO) are taxed in the same way as any other crypto-to-crypto transaction.
Mining & Other Situations
The tax treatment of cryptocurrencies is fairly straightforward for most traders and investors, but it's a little more challenging for individuals or businesses involved with mining or financial transactions involving cryptocurrency.
Miners may be subject to a few different types of tax depending on the situation:
- Hobby miners are treated the same as a trader or investor. Capital gains are assessed upon the sale of any crypto assets and the cost basis for the crypto is zero.
- Businesses must treat crypto as inventory, which can be valued based on its acquisition cost or fair market value at the end of the year (looking at each item or the entire inventory). Any sales are recorded as business income.
Businesses also have the ability to deduct their expenses from business income. For instance, mining hardware, electricity and other costs can be calculated on a per coin basis and deducted against the sales proceeds.
These same rules apply when lending cryptocurrency and generating interest as a financial entity. For example, a company that lends cryptocurrency to traders and charges them interest must record the interest as a capital gain/loss or business income.
Tracking Your Crypto Transactions
Crypto traders, investors and consumers should always record their transactions — even when they're buying and holding — to avoid any issues when tax time comes.
ZenLedger makes it easy to aggregate transactions across multiple exchanges and offline wallets, as well as auto calculate your capital gains or losses. Since the entire process is automated, there's a defensible approach and audit trail in place in case tax authorities have any questions. While ZenLedger doesn't cover the Canadian market right now, we plan on doing so soon — so stay tuned!
The Bottom Line
Canada's crypto tax laws mirror those of many other countries, including the United States. Of course, these regulations are constantly changing as the crypto market evolves into both an important asset class and a medium of exchange. Traders and investors should keep an eye on these changes to avoid running into trouble when tax time comes around.
It's important to consult with a trusted financial advisor when preparing your crypto taxes in order to avoid any confusion and ensure that you're complying with the latest guidelines.