In Canada it is extremely important to keep track of all cryptocurrency trades to remain onside with the Canada Revenue Agency (CRA).
The CRA views cryptocurrency as a commodity for tax purposes, therefore, cryptocurrency trading may result in tax implications to be reported on the tax return. The CRA assigns the responsibility of tracking and reporting this income solely to the taxpayer.
Contrary to common belief, all cryptocurrency trades are taxable for Canadians. Many individuals assume that you are only taxed once you convert your cryptocurrency to fiat, this view is incorrect and will result in being offside with the CRA.
The following common transactions all result in tax consequences:
- Exchanging cryptocurrency for fiat currency (eg. CAD, USD);
- Exchanging cryptocurrency for another type of cryptocurrency;
- Exchanging cryptocurrency for stable coins;
- Using cryptocurrency to purchase goods or services;
- Exchanging cryptocurrency for an initial coin offering;
- Gifting or donating cryptocurrency;
- Yield farming and other DeFi activities.
The above is not an exhaustive list, however, if you have completed any type of transaction above, it is very likely you have triggered a taxable event that must be reported on your tax return.
This is further supported when we consider how volatile cryptocurrency can be and how fast values change after purchase. Depending on your situation the taxable event will be treated as a capital gain/loss or business income/loss.
Tax consequences will occur for transactions where your cost base of the cryptocurrency is greater than or less than the disposition value.
How to calculate taxes on crypto trades
When dealing with crypto to fiat trades the implications are simple, the taxable event is simply the proceeds of the sale minus the adjusted cost base of the cryptocurrency sold.
However, transactions beyond this can be complex, the examples below explain how to calculate the tax implications of exchanging crypto for crypto and purchasing goods/services using crypto. These examples are provided directly from the CRA.
CRA Example – Calculating taxable income on crypto-crypto trades
“On July 30, 2018, Francis bought 100 units of Ethereum, which had a value of $20,600. For this purchase, Francis used 2.5061 Bitcoins, which were trading at $8,220 per unit on that day, or the equivalent of $20,600. We consider that Francis disposed of those Bitcoins.
Francis originally bought those Bitcoins for $15,000 and exchanged them for 100 units of Ethereum at a value of $20,600, resulting in a capital gain.
It is calculated as follows:
$20,600 [fair market value of 2.5061 Bitcoins at the time of transaction]
– $15,000 [adjusted cost base of 2.5061 Bitcoins, their original purchase price]
$5,600 capital gain
$5,600 capital gain taxed at 50% = $2,800 taxable capital gain”
“This example assumes that the cryptocurrency in question was held as an investment on account of capital; however, if this transaction occurred in the course of conducting a business, the entire amount of $5,600 would need to be reported as income in the first transaction and the entire $4,400 would be reported as a loss in the second transaction.”
CRA Example – Calculating taxable income on purchasing goods with crypto
“Tim found a deal on a living room set at an online vendor that accepts Bitcoin. Tim acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he bought the furniture and converted his remaining Bitcoin back into dollars, the value of Tim’s Bitcoin had increased by $500. The gain realized by Tim was on account of capital, so Tim has to report a $500 capital gain on his income tax return. However, only 50% of that capital gain is taxable.”
Due to the numerous ways that cryptocurrency trading can trigger taxable income in Canada, it is extremely important to accurately track all cryptocurrency trades.
This can be difficult as each type of cryptocurrency holds its own specific cost base, it is not lumped together with other types of cryptocurrencies. For example, the total cost base of your Bitcoin is tracked separately from the total cost base of your Ethereum.
Traditional methods of tracking can be time consuming and inaccurate, especially when considering implications of complex tax rules such as the superficial loss which denies a capital loss when you sell and repurchase the same cryptocurrency within a short period of time.
There is also the T1135 reporting requirement to evaluate if your cost base exceeds $100,000 CAD at any point in the year. Crypto tax software is key to accurately and efficiently tracking cryptocurrency transactions; tools such as Cointracking.info automate the process to generate the required tax reports.
Learn how to import trades from your favorite crypto exchanges into CoinTracking via API:
Always consult an expert
We recommend consulting the advice of an expert when evaluating your specific tax situation. Working with a CPA who is experienced with the cryptocurrency landscape is crucial when preparing your tax return involving cryptocurrency activities. TSB Chartered Professional Accountant Inc. are leaders in Canadian cryptocurrency taxation and are available to analyze your tax situation.
The crypto tax software in Canada: CoinTracking
The best crypto tax software for Canadian investors is CoinTracking.
You can import your trades using CSV or API, track your gains/losses, and generate tax reports according to your preferred accounting method.
CoinTracking is your full crypto tax solution for:
Moreover, CoinTracking can easily classify all your earnings from yield farming, liquidity pools, crypto staking, and much more.
Crypto taxes with no errors: CoinTracking Full Service in Canada
CoinTracking also offers a Full Service for Canadian traders powered by TSB Chartered Professional Accountant Inc. Full Service providers will review your CoinTracking account, help fix any errors, and ensure you submit your crypto tax reports error-free.
This article was written in collaboration with Tristan Bagri, CPA, Founder & Director at TSB Chartered Professional Accountant Inc.
Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. You should conduct your own research or consult with a professional financial advisor when investing. You should consult with a Chartered Professional Accountant when evaluating your tax situation.