Is Crypto Taxed in Canada? – Canadian Crypto Tax Guide 2022

With tax season among us, many investors are wondering how cryptocurrency investments are taxed in Canada. After all, 2021 was a record year for all assets (including cryptocurrencies). Now, many investors are wondering how the Canadian Revenue Agency (CRA) will tax their crypto investments in Canada. 

Although at Netcoins, we focus on creating a beautiful, quick and easy-to-use crypto trading platform for Canadian investors, that didn’t stop us from getting answers. 

We spoke with Eric Cohen, Partner at VCG S.E.N.C.R.L / LLP (a Montreal-based accounting firm with experience in cryptocurrency investments), to help explain how crypto is taxed in Canada by the CRA.

To help you get started, read the guide below, download your transaction history and speak with a tax professional.

**We’d like to remind you that this guide is for educational purposes only. It is not financial advice. For proper financial advice, we recommend you speak to your tax professional.

The Basics of Canadian Crypto Taxes in 2022

To start, how is cryptocurrency taxed in Canada?

You will be taxed depending on how you’re using cryptocurrency. Is your cryptocurrency a means of exchange? Is it for trading? Perhaps, mining or staking? Most Canadians will fall under the trading category because they’re simply just buying bitcoin (or other cryptocurrencies) and selling it. In this particular case, the trade would typically be taxed as a capital gain. 

A capital gain is an increase in an asset’s value (or profit). They are taxed when these gains are realized (or sold). You have a capital gain when you sell or are considered to have sold your asset. 

For example, you sold all your bitcoin for $70,000 CAD but you originally bought it for $30,000 CAD. Your capital gain is $40,000 CAD.  

In Canada, 50% of your capital gains are taxable. This means of the $40,000 profit you made upon selling, you would have to report $20,000 as income for your taxes on Section 5 of Schedule 3 of your income tax return. 

Keep in mind that some traders may be subject to business income instead of capital gain. That’s why it’s important to speak with your tax professional to determine the proper taxation treatment.

Can you elaborate on crypto capital losses?   

Capital loss is the opposite of a capital gain. It’s when the value of your investment decreases from the original price you bought at. Capital losses can be used to offset capital gains and may reduce the overall tax you have to pay. 

Related: 5 Reasons for the Recent Crypto Price Dip and Bounce Back

Can you expand on what crypto transactions are taxable in Canada? 

Various crypto-related activities like selling, converting crypto to crypto, gifting and so on get taxed differently. Here’s a high-level overview for each of these points.

Selling crypto: If you buy cryptocurrencies and sell them at a higher price that’s typically considered a capital gain. Remember, 50% of your (realized) capital gains will be taxed at your tax bracket in Canada. 

Related: The Pros and Cons of Day Trading Vs. Long-Term Crypto Investing

Transferring crypto: If you bought crypto from Netcoins and then transferred to a crypto wallet or another discount brokerage, this is not considered to be a taxable event and therefore you do not have to file taxes for this. The reason it’s not considered a taxable event is because you’re still in possession of the same crypto asset, therefore a taxable event (like selling) hasn’t yet occurred. It’s similar to transferring dollars from your checking account to your savings account and not having to pay taxes on it.

Crypto-to-crypto conversions: If you’re converting a cryptocurrency for another cryptocurrency (i.e: Ether to XRP) a transaction has officially been made, a taxable event has occurred, and you will have to pay capital gains on it. Taking it one step further, if you convert from bitcoin to ethereum to litecoin, each individual conversion should be computed and each capital gain should be reported. It will be important for you to keep track of all your conversions, the price you bought each asset for and the realized gains. 

Using crypto: This depends on how you’re using crypto and whether or not the rule for barter transactions needs to be applied. There are after all plenty of ways to use and spend bitcoin. Let’s assume you owned bitcoin and you used it as a downpayment for a house. Now, let’s assume your bitcoin has appreciated in value by $5,000. In theory, you have a $5,000 capital gain. But if you actively use bitcoin as a means of exchange to buy goods no revaluation is needed. It’s similar to using Canadian dollars to buy goods.

Related: Where Can Canadians Spend Bitcoin? 

This is also comparable to holding USD in your bank account. If you buy $1,000 USD today that’s worth $1,300 CAD. You would not report the $300 “gain” because your USD balance is used for transactions, not investments. 

Related: Bitcoin As Legal Tender? El Salvador is Just the First Domino to Go Down

Again, it can be helpful to organize and separate your crypto holdings according to their different use-cases. Is it for investment purposes or daily transactions? Crypto used for investment purposes will be subject to valuation gains and losses while crypto used for daily transactions may not be subject to the same taxation rules. 

Gifting crypto: In Canada you can gift anything to anyone, tax-free. However, it’s a little bit more nuanced with crypto. The question here is: “what was the purpose of the crypto to begin with?” Did you buy it with the intention of investing in it at first before gifting it? Or was it always meant to be a gift? In the first case, you may need to pay tax on it (but the recipient will not). In the second case, neither party will have to pay taxes on it. 

What happens if you buy crypto but never touch it, do you have to report it then?

If your crypto is just sitting on profits and you haven’t sold, then that’s considered an unrealized gain. In this case, you do not have to report this. Again, here’s where it gets a little tricky…

If, as a Canadian, you hold over $100,000 CAD worth of cryptocurrencies within a foreign crypto exchange, like Coinbase, you will have to fill out the T1135 form (the “Foreign Income Verification Statement”). This is a form that we file with the Federal government to report investments over $100,000 CAD that are held outside of Canada during the year. The word “during” is important here.

Imagine you had $150,000 in Coinbase during the year but then transferred to Netcoins at the end of the year. You’ll still have to file the T1135 form because your investments were technically outside of Canada (with Coinbase) at some point throughout the year. If you don’t file this form, you can be assessed a $2,500 penalty per year plus interest and other fees. If you own less than $100,000 abroad then you don’t need to fill out the form.

Note: If you hold over $100,000 CAD worth of crypto on Netcoins, the T1135 form is not required as Netcoins is a Canadian exchange.

Note that the T1135 form is purely informational and will not impact your taxes. The Canadian government simply wants to know if you have investments “outside” of the country (given what happened with the Panama papers a few years ago). 

Is Crypto Mining considered a taxable event? What about staking or yield farming?

This depends on whether it’s a hobby or not so this is assessed on a case-by-case basis. In general, a hobby is undertaken for simple pleasure or enjoyment. But if mining is pursued with more of a business-oriented manner, the tax treatment will be different. 

For example, if it’s just yourself mining bitcoin as a hobby and you make $30,000, you’d pay capital gains on that. But if you set up an entire operations system with 20 miners, then you’re mining with the purpose of creating a business and you’ll be taxed accordingly (as business income). 

With staking, the income from staking is treated as interest income. The drawback here is that it falls under a high tax rate. This tax rate will be determined by each person’s overall taxable income (which is also subject to the marginal tax rate). 

For example, a person in BC earning $40,000 salary and earns $5,000 of staking revenue can expect to pay about 20% taxes on their staking revenue. But, a person in BC earning a $100,000 salary and earns $5,000 staking revenues can expect to pay about 33% taxes on their staking revenues. For more information on your tax bracket, visit Taxtips.ca 

How about Non-Fungible Tokens (NFTs)? Are NFTs taxed in Canada?

With the recent surge in popularity of NFTs, it’s important to mention that a similar analysis of NFT transactions is required to determine if and how transactions are taxable in Canada. Similar to cryptocurrency, a taxable event needs to occur before a transaction becomes taxable. 

If you buy a NFT and later sell it at a profit, a taxable event has occurred and you would likely be subject to capital gains tax. If you mint a NFT, your cost basis is simply the minting costs, or gas fees incurred to complete the creation of the NFT. 

Finally, it’s always advised to do your own research and speak with your tax advisor if you have any questions.  

Sign up to a free Netcoins account here.

Thank you so much for taking the time to walk us through how cryptocurrencies are taxed here in Canada. Where can people reach out to you for more information? 

Thank you for having me. You can reach me at my email ecohen@vcgllp.com and visit VCG S.E.N.C.R.L / LLP at https://vcgllp.com/

References:

• Canada’s guide for cryptocurrency users and tax professionals
• Visit Taxtips.ca to find out relevant and useful tax information, including your income tax bracket 
• Schedule 3 – Summary of Dispositions – Capital Gains (or Losses)
• T1135 – Foreign Income Verification Statement
• T2125 – Statement of Business Activities – if you have “business” activity from any of the above transactions, individuals would need to fill out this form on their personal tax returns

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