In Canada, a Guide to Cryptocurrency Taxes for the Years 2021
Whether you’ve gained or lost in your crypto exploits, there are tax consequences to consider. Here’s what you need to know about crypto taxes including what type of tax you need to pay, how to figure out what you owe and which crypto-related expenses can be treated as tax deductible.
Important:
This guide summarizes some of the CRA’s most important rules on cryptocurrency taxation. We’re not tax experts, and this information should not be taken as professional advice for your own circumstances. Crypto tax is an evolving space, and regulations may change over time. Consult a tax professional, or check out the CRA’s guide to cryptocurrencies to make sure you’re managing your taxes correctly.
How does the CRA treat cryptocurrency?
Cryptocurrency is considered a digital asset by the CRA. It’s not recognized by the Canadian government or courts as legal tender (real money) like Canadian dollars, US dollars, euros etc. As an asset, cryptocurrency is taxed much like an investment. What matters are your profits and losses from buying and selling crypto, not how much the crypto you’re holding is worth.
When do I have to pay taxes on cryptocurrency?
Cryptocurrency becomes taxable when you dispose of it. This happens when you:
Sell or gift cryptocurrency
Example: If you buy 1 Bitcoin for $10,000, then sell it later for $25,000, you’ve earned a taxable profit of $15,000. But if the price of Bitcoin drops and you sell it for $7,000 instead, you can treat the loss as tax deductible, either as a business loss or a capital loss depending on the circumstances.
Trade or exchange cryptocurrency for legal tender or another cryptocurrency
Example: Say you have 1 Bitcoin worth $10,000, but you think the value will go down and would rather invest in Ethereum instead. You find a buyer who is more optimistic about the future value of Bitcoin, and the two of you agree to exchange your single Bitcoin for 26.88 of his Ethereum (at $1,500 per ether, this amounts to $40,320 total). By losing a $10,000 asset to gain a $40,320 asset, you’ve made a total of $30,320. Even though no government-recognized currency like CAD or USD was used in the exchange, the amount you’ve earned is still subject to tax law.
Convert cryptocurrency to a government-issued currency like Canadian dollars
Example: You have 1 Bitcoin in your crypto wallet, but you want to cash in and use the funds to help cover some unexpected expenses. You trade your Bitcoin for $10,000 and transfer the funds to your bank account. The dollar value of your crypto at the time you trade it — in this case, $10,000 — is subject to tax law.
Buy goods or services with cryptocurrency
Example: You run an electronics retail and repair shop and have decided to begin accepting Bitcoin as payment. A customer buys a $3,000 home entertainment system and pays with Bitcoin. Because cryptocurrency isn’t recognized as legal tender, the CRA views a transaction like this as “bartering.” Tax laws for bartering stipulate that the value of the goods or services you’re giving up must be included with your income if you would normally provide these goods or services in the course of your profession. As an electronics store owner, you normally sell audio and visual equipment, so this transaction is taxable. Though no legal tender was exchanged, you must still declare $3,000 as part of your business income. (If, for some reason, you would normally have to report customer payments as capital gains instead of business income, then you’d have to continue doing so when accepting payment in cryptocurrency. However, most of the time, crypto revenue will count as business income not capital gains.)
The type of tax you’ll pay depends on whether your crypto earnings are classified as business income or capital gains.
How is cryptocurrency taxed for individuals?
If your crypto earnings don’t fall within the scope of “business income,” then you must treat these earnings as capital gains on your personal income tax return. However, there are some exceptions to this rule which are explained in more detail below. Here’s how it works:
- A capital gain occurs when you earn money from selling or exchanging crypto that has increased in value. In Canada, you’re only taxed on 50% of realized capital gains. (Capital gains are “realized” when you dispose of an asset and “unrealized” when you hold onto it.)
- A capital loss occurs when you lose money from selling or exchanging crypto that has gone down in value. Capital losses are tax deductible and can be used to reduce the income tax you owe the CRA.
For example, if you buy or otherwise obtain 1 BTC worth $10,000, then sell or spend it when it’s valued at $20,000, you’ve realized a capital gain of $10,000. You would only have to pay income tax on 50% of this, or $5,000.
How to calculate capital gains
Cryptocurrency tax deductions for individuals
When filing your individual tax return, see if you can apply any of the following crypto-related tax deductions to reduce your taxable income:
- Fees paid for professional investment advice
- Crypto donations to charities
- Moving expenses to work, run a business or study full-time (some retailers accept payment in crypto and legal tender like Canadian dollars)
Fees for buying and selling cryptocurrency are not tax deductible, because these are used to calculate the adjusted base cost of assets, which can reduce your taxable capital gains.
How is cryptocurrency taxed for businesses?
If you sell or exchange cryptocurrency in the course of business, any resulting profits are treated as either business income or capital gains. This is true regardless of whether you run a cryptocurrency-centred business or some other type of enterprise.
The line between personal and business activities is fuzzy in some places. For example, both individual investors and crypto businesses can engage in many of the same activities like mining, trading and lending. The CRA does not specifically define the phrase, “in the course of business.” Rather, the CRA looks for signs that you may be carrying on a business to determine if your crypto profits were earned from business activity.
The following factors could indicate that you’re operating a business:
- You buy or sell for commercial reasons
- You go about activities in a “business-like” way, (i.e. you use business plans, acquire capital, handle inventory etc.)
- You advertise a product or service
- You show an intent to earn profit, even if you don’t expect to earn anything in the short run
- You perform commercially viable activities regularly or repeatedly
Note: If you’re in the process of setting up a business, the CRA likely won’t count it as a business for tax purposes.
Business income versus capital gains
If your crypto is classified as inventory for your business, then your earnings count as business income. If your crypto is classified as business capital, then your earnings count as capital gains. How do you determine whether you use crypto as inventory or as capital?
Crypto may be business inventory if any of the following is true:
- You trade it with customers
- It’s a source of revenue for your business
- You acquire it with the intent to dispose of it shortly afterwards
If you determine that the cryptocurrency you’re holding is inventory, then you must report its value on your next business tax return. The value is based on the cost of your crypto (in Canadian dollars) when you acquired it, so it’s important to keep careful records of all your crypto transactions. You will also need to report any earnings or losses from disposing of crypto as part of your business income.
Crypto may be business capital if any of the following is true:
- You use it to develop your business
- You use it to sell your core products or services
- You acquire it with the intent to hold onto it
If you determine that the cryptocurrency you’re holding is capital, then you must report any capital gains or losses on your next business tax return.
How to calculate capital gains
How to tell whether you're an investor or professional trader
Investors typically acquire assets with long-term financial goals in mind. On the other hand, professional traders typically buy and sell assets in the short run for profit. Because traders buy and sell more frequently, they are more likely than investors to be classified as operating a business for tax purposes.However, this may not always be the case, and there are other factors that contribute to the CRA’s assessment of your crypto activities (like the factors mentioned above). We recommend getting professional advice from a crypto tax specialist to find out how your situation should be classified.
Accepting cryptocurrency as payment from customers
When cryptocurrency is accepted as payment for goods or services, the CRA doesn’t recognize it as a transaction involving legal tender. Instead, it’s considered “bartering.” You’re only taxed on bartered transactions if the goods or services that you give up are what you would normally provide in the regular course of business. Therefore, businesses that accept crypto as payment for products or services must treat it as business income.
The value of any crypto payments you receive is based on the fair market value of those payments at the time of sale. So, if you agree to receive 0.0167 Bitcoin as payment for a purchase that costs $500 total, you would count that $500 sale as part of the business income you declare on your next business tax return. GST/HST would also be based on the fair market value.
(If, for some reason, you would normally have to report legal tender payments as capital gains instead of business income, then you would similarly report crypto payments as capital gains. However, for most businesses, crypto payments count as a form of business income, not capital gains.)
Paying employees in cryptocurrency
If you pay employees in cryptocurrency, they must report the equivalent value in Canadian dollars as income on their personal tax returns. As the employer, you’re still responsible for making sure the right deductions are made including CPP, EI and so forth. Keep a record of the value of each crypto payment you make to employees including the equivalent value in Canadian dollars at the time of payment. When creating T4 slips, add these Canadian dollar amounts into employees’ total incomes.
Employees are responsible for reporting any capital gains or losses that come from their crypto fluctuating in value. For example, if you pay an employee $1,000 worth of Bitcoin and she trades, exchanges or spends it when its value has risen to $1,400, she must declare a capital gain of $400 on her personal tax return.