Buying Cryptocurrency With Fiat Currency
Buying cryptocurrency with fiat is not considered a taxable event in Canada. Note that its important to keep track of all your purchases and complete transaction history so that you can calculate your cost basis and deduct the costs when you later dispose of the assets.
Capital gains / business income
Other Taxable Transactions In Canada
We have so far covered some of the most typical cryptocurrency transactions you might have to consider when it comes to taxes in Canada. There are also many other different ways that you can either send or receive crypto. Below, we will comment briefly on the tax treatment of other transaction types and events not already mentioned.
What Triggers A Crypto Tax
If you know how taxation works for financial assets, such as stocks, you can apply some of that knowledge to crypto tax. However, if you have no idea what can trigger a crypto tax, heres how it works. Since the CRA considers cryptocurrency a commodity, you would not owe taxes for just buying them and storing them in your crypto wallet. However, when you sell a cryptocurrency or transfer it to someone as a gift, this can result in a tax payable.
To avoid any doubt, the following crypto transactions can lead to you owing or paying crypto tax:
- Exchanging cryptocurrency asset for another cryptocurrency asset
- Selling a crypto asset to another party
- Converting your cryptocurrency to cash
- Using crypto as a mode of payment for goods or services
- Giving out crypto as a gift
There are two primary reasons people own cryptocurrency assets: capital investment or earning profit through short or long-term gains. Usually, people who purchase crypto assets for profit engage in frequent crypto trading activities.
Depending on your cryptocurrency transactions and activities, the CRA requires you to pay crypto tax either as a business income tax or a capital gains tax.
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Bitcoin Taxation Canada Still Unclear
While it may seen that these rules about the tax treatment of Bitcoins are relatively simple there is actually still a great deal of uncertainty.
For example, how do foreign currency transactions apply with respect to Bitcoins?
Prudent advice from our professional Toronto income tax lawyers is necessary to ensure that you do not fail in your reporting obligations.
How Are Capital Gains And Losses From Virtual Currencies Tracked
If the fair market value of property received in exchange for virtual currency exceeds the taxpayers adjusted basis of the virtual currency, the taxpayer has taxable gain. Similarly, the taxpayer recognizes loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.
The IRS has not addressed how to track the computation of capital gains and losses in the context of convertible virtual currencies. Some practitioners have suggested to simplify the burdensome record-keeping requirements that are necessary to calculate virtual currency gains and losses by applying §1012 tracking methods under FIFO, LIFO, or the specific identification method akin to the way stocks are sold through an exchange.
In addition, practitioners have suggested that the IRS should provide a de-minimis rule for taxpayers who may have a minimal amounts of virtual currency transactions or small transactions .
From in-depth research and analysis to timesaving practice aids, Bloomberg Tax & Accounting has the resources you need to provide informed advice.
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Manually Calculating Your Cryptocurrency Taxes
Filing and reporting cryptocurrency taxes can be summarized in the following four steps:
This can be a very tedious and complicated process for most people that have had more than a few transactions during the year.
Why Does The Irs Want To Know About Cryptocurrency
In recent years, the IRS has increased scrutiny on cryptocurrency transactions. In 2020, a new question was added to Form 1040 that specifically asked taxpayers if they transacted in cryptocurrency during the tax year.
Remember, answering yes to this question will not increase your crypto tax liability. Itâs likely that the IRS is asking this question to gather more information about the digital asset ecosystem.
Not answering this question truthfully is a red-flag to the IRS, and itâs possible youâre more likely to be audited from doing so.
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Moving Cryptocurrency From One Wallet To Another
If youre 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 havent sold any of your cryptocurrency during the process.
That being said, there might be some tax implications . . . sort of.
Lets 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.
The Government And Cryptocurrency: Can They Control It
The relationship between the government and cryptocurrency is a complicated one. On one hand, the government wants to control and regulate it in order to prevent money laundering and other illegal activities. On the other hand, they recognize the power and potential of cryptocurrency and want to find ways to harness that power for themselves. In this article, we will explore the various ways that governments have tried to control cryptocurrency, as well as how successful they have been.
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What Is The Canadian Tax Year
The Canadian tax year runs from the 1st of January to the 31st of December every year, with tax returns due by the 30th April every year.
The information on this website is for general information only. It should not be taken as constituting professional advice from Koinly. Koinly is not a financial adviser. You should consider seeking independent legal, financial, taxation or other advice to check how the website information relates to your unique circumstances. Koinly is not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.
How To Calculate Your Cryptocurrency Taxes Canada
Calculating your crypto taxes so you can accurately report them to the CRA can take hours – if not days if you trade at volume! You can do it all manually, or you can use a crypto tax app like Koinly to save you hours.
To calculate your crypto taxes manually, follow these steps:
If you have a higher net capital loss than your net capital gain, remember you can carry capital losses forward to future tax years to offset against future gains.
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How To Calculate Capital Gains In Canada
A capital gain occurs when you sell a cryptocurrency for more than the original purchase price. On the other hand, if the sales price is lower than the purchase price, it is considered a capital loss. Only half of the capital gain is subject to tax in Canada as already mentioned, and you can also use any capital losses to offset your capital gains.
The general formula for calculating capital gain is:
capital gain = selling price purchase price
To calculate the capital gains you need to first establish the cost basis for the cryptocurrency you are disposing of. In Canada, you need to use Adjusted Cost Base which is simply the average purchase cost of all coins you have in possession. The capital gain for each transaction is then determined as the ACB value subtracted from the selling price.
For more information about how Adjusted Cost Base including the Superficial Loss Rule works, see our detailed article about how to calculate cost basis in Canada:
What Are The Requirements For Specific Identification
The IRS, however, has imposed requirements upon taxpayers that want to use Specific Identification.
First, a taxpayer must, show the date and time each unit was acquired, your basis and the fair market value of each unit at the time it was acquired, the date and time each unit was sold, exchanged, or otherwise disposed of, and the fair market value of each unit when sold, exchanged, or disposed of, and the amount of money or the value of property received for each unit.
In simpler terms, the IRS requires a complete set of transaction records when a taxpayer wants to use Specific Identification.
Second, the IRS guidance requires that Specific Identification be done on a per account and per wallet basis. Specific Identification shouldnt be used when universally pooling assets.
TaxBit provides support for Specific Identification on a per account or wallet basis in order to legally minimize users’ taxes and reconcile to any Forms 1099 issued by exchanges. TaxBit automates the process by specifically identifying, by exchange, the assets with the highest cost basis for disposition to reduce taxable gains.
TaxBit also is able to provide the complete records necessary to support your use of Specific Identification. TaxBit supports a massive amount of cryptocurrencies so all of your information can be housed in a single, easy to navigate location.
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Mining And Staking: Business Income
The CRA acknowledges that crypto mining or staking can be either a personal activity, i.e. a hobby, or a business activity and evaluates cases on an individual basis. However, the CRA has indicated that it considers most mining and staking operations to be business activities and subject to business income tax.
A tax professional can help you determine how your mining or staking income should be classified.
The corporate income tax is 38% of taxable income however, after a federal tax abatement for income earned within Canada, it is 28%.
Some types of businesses receive additional preferential tax treatment. For example, small businesses are taxed at 9%.
For businesses that do not receive other preferential tax treatment, there is a general tax reduction that brings the rate to 13%.
However, although provinces use the federal rate as a guide, they may change the maximum rate for example, while the maximum rate on Prince Edward Island is 16%, in Ontario, it is only 11.5%.
A Cbdc Or Central Bank Digital Currency Is A Step Closer In The Us But Going Digital Will Take Years
Disruption. It’s coming for the U.S. dollar in the form of digital currency. Last week the Biden administration detailed a broad plan for adopting a central bank digital currency in the coming years. The Departments of Energy, Commerce, the Treasury, and other agencies weighed in on how to manage and regulate a CBDC.
The government is reacting in part to the explosive growth of digital currencies. About three out of ten U.S. adults currently invest in some form of cryptocurrency, or crypto, like Bitcoin or Ethereum. These digital coins rely on a decentralized network of computers to verify financial transactions, cutting out third parties like banks or credit cards.
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Defi Trading As An Individual
As we already said, the tax treatment of your DeFi investments is all going to come down to whether the CRA views you as an individual investor or sees your crypto investments as more akin to business income. They decide this on a case-by-case basis – but if you’re seen to be trading as an individual, you’ll pay Capital Gains Tax on any profits, not Income Tax.
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What Are The Dangers Of Cryptocurrency
Cryptocurrency has its dangers. For one, it is often used to commit crimes such as money laundering and drug trafficking. In addition, the government does not yet fully understand cryptocurrency and its potential for misuse. The government may try to regulate or ban virtual currency in an effort to control it, but this could backfire and stifle innovation in the cryptocurrency space.
The Superficial Loss Rule
To prevent wash sales, the CRA has the superficial loss rule. It kicks in when both these conditions are met:
- The taxpayer acquires cryptocurrency that is identical to the one that they dispose of, either 30 days before or after the disposition, and
- At the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the identical property.
What all this means is if you sell and buy assets of a similar kind within a 30 day period – you can’t offset these capital losses against your capital gains.
Good to know
Please note if you’re a newcomer to Canada – there’s a specific rule about how to value your property that you acquired before arriving in Canada.
If you owned certain properties – like shares or other capital assets excluding taxable Canadian properties – at the time you immigrated to Canada, the CRA considers you to have sold the properties and to have immediately reacquired them at a cost equal to the fair market value on the date you became a Canadian resident. This is what’s known as a deemed disposition.
In other words, you’ll need to adjust your cost basis for all your crypto to the fair market value in CAD on the day you became a resident of Canada. You’ll need to keep these records to ensure you can calculate your gain or loss correctly if you later dispose of your crypto.
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Previous Tax Years Available
As a cryptocurrency tax software founded by CPAs and tax attorneys, we believe in helping taxpayers comply with their tax obligations. To this end, TaxBits Basic, Plus+, and Pro plans include all prior year tax forms.
Some users wish to amend prior year tax returns to account for their cryptocurrency activity. TaxBit wants to lessen the burden of being retroactively tax compliant.
Bitcoins As Barter Transactions
To get a better idea how the barter transaction would be taxed with a Bitcoin used as currency, one needs to have a basic understanding of how a more traditional barter transaction works. In a barter scenario, when a taxpayer pays for goods or services using Bitcoins, they will need to include the fair market value of the goods that they receive into their income when they file their tax return. This is to ensure that the full value of the goods or services received are accounted for in the taxpayers income.
As an example, say a Taxpayer who owns a retail store purchases a product with a fair market value of $20. The store owner pays for the product with say one Bitcoin having a value of $20. Because Bitcoins are not official currency, in order to ensure that the entire value sold to the consumer purchaser through the transaction is accounted for when determining the store taxpayers income for the year, the value of the product, $20, not the value of the Bitcoin when the goods are sold, is used for tax purposes.
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Buying Goods Or Cryptocurrencies With Cryptocurrency
Heres where things get a touch complicated. Youre required by law to keep records of your trades. If you didnt keep records, you need to make your best guess and hope the CRA doesnt 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.
Lets 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 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.