**Note, I am not an accountant, nor am I an expert on cryptocurrencies. You should seek the advice of an accountant with experience in cryptocurrencies if you have any serious questions or concerns.
With the explosion of Bitcoin, Ethereum, and whatever other cryptocurrencies that currently exist or will come to exist, many people are starting to invest. These products aren’t exactly new, but they’ve been making headlines as of late for their huge gains (and losses).
If you invested early, you could have easily become a millionaire. As with any hot investment, many Canadians are trying to jump on the bandwagon so they too can make a fortune. Regardless of how much profit these investors make, they’re going to have to eventually deal with taxes. Below you’ll find some common questions and scenarios when it comes to cryptocurrencies in Canada and how to deal with them. If you’re new to cryptocurrency, be sure you read this post on the 7 things you need to know about cryptocurrency before you start investing.
How is cryptocurrency taxed in Canada?
Cryptocurrency is taxed like any other investment in Canada. 50% of the gains are taxable and added to your income for that year. Let’s say you bought a cryptocurrency for $1,000 and sold it later for $3,000. You would have to report a capital gain of $1,000 (50% of $2,000) which would be added to your income and taxed at your marginal tax rate.
Note that the above scenario applies to normal buy and hold investors. If you’re a high volume trader e.g. someone who holds cryptocurrencies for a short period of time or day trades them, the CRA may consider it a business and you’ll have to file your taxes accordingly.
Trading cryptocurrency in your TFSA and RRSP
With any potential capital gain, investors will always try to shelter themselves from taxes. The next logical question people ask is can I trade cryptocurrency in my TFSA and RRSP?
That being said, there is a way to legally hold cryptocurrencies in one of your tax-friendly accounts. To do this, you can purchase an Exchange Traded Fund that invests in cryptocurrencies such as “GBTC” or “COINXBT.” Keep in mind that these are very new funds with no track record and potentially limited liquidity. In other words, if there’s a major selloff, those ETFs may not have enough cash to full everyone’s sell orders.
Buying goods or cryptocurrencies with cryptocurrency
Here’s where things get a touch complicated. You’re required by law to keep records of your trades. If you didn’t keep records, you need to make your best guess and hope the CRA doesn’t audit you.
These records are vital due to the capital gains you make. Now keep in mind that capital gains can apply in more than one circumstance.
Let’s say you bought 1 Bitcoin for $100 but it has a current market value of $15,000. You decide to make renovations to your home and the contractor agrees to trade his services which are normally worth $15,000 for 1 Bitcoin.
In this case, both parties are liable for taxes. The original Bitcoin owner would pay capital gains on $7,450 (50% of $14,900) while the contractor would still need to report business income of $15,000. The CRA covers the details of taxes for this transaction in this post.
When trading entire amounts, things are easy. However, if you purchase cryptocurrencies at various times at different prices, you need to log all those transactions and calculate your adjusted cost base when selling later.
Moving cryptocurrency from one wallet to another
If you’re simply moving your cryptocurrency from one wallet to another e.g. from Coinbase to GDAX or your own wallet then it would not be a taxable event as long as you haven’t sold any of your cryptocurrency during the process.
That being said, there might be some tax implications . . . sort of.
Let’s say you paid a $10 transfer fee, well that would be a transaction cost which you could deduct from your capital gains later. The same applies to any fees you incur when you buy or sell your crypto.
What if I don’t report my cryptocurrency gains?
You’d be breaking the law, it’s called tax evasion which is a crime that could get you sent to jail. The CRA likely won’t go as far as sending you to jail, but they do want to ensure that they’re getting their cut.
If you fail to report your taxes or you file incorrectly, the CRA could charge you penalties and interest later which could cost you a fair amount of money. Considering how big of a deal cryptocurrencies are right now, there’s a good chance that the CRA is keeping an eye on things.
You may think that these transactions can’t be traced back to you, by usernames exist and so do the exchange records.
How is cryptocurrency taxed in Canada is not an easy question to answer. If you’re unsure about how to handle your taxes, speak to an accountant who has experience with cryptocurrencies who can guide you through the process or file your taxes on your behalf. Canada’s tax system is fair, don’t try to cheat it unless you enjoy committing fraud.