So you're new to the world of cryptocurrencies (who isn't), and you want to know what you're supposed to do when it comes to your Canadian taxes? Good news — we're here to help.
More good news — it's probably not as complicated as you think. And paying the taxes likely won't cost you as much as you may think. If you're a cryptocurrency investor in Canada, you’re subject to capital gains and losses just as with other kinds of currency trading, stocks, or mutual funds. All the same rules apply.
For those new to investing in general, it's important to know that you just have to pay tax on HALF of the capital gain. Let's say you purchased one Bitcoin for the lowly price of $100 and then sold it when the price reached $15,000. So you earned a profit of $14,900. But currently capital gains are only 50% taxable in Canada, so that means you would only have to add $7,450 to your income in the year you sold the Bitcoin and realized the capital gain. In this example, you would be taxed on $7,450 in whatever tax bracket your total annual income happened to be the year you sold your Bitcoin. Let's say your total income for the year was $65,000, which would put you squarely in the second tax bracket. The second tax bracket in Ontario is right around 30% combined federal and provincial tax, which means the tax consequence of realizing a $14,900 capital gain for someone who earns around $65,000 would be approximately $2,235 in tax. Not bad!
Here's what you need to know:
Keep good records when it comes to how much you spent to BUY your favourite cryptocurrency. Regardless of whether you make or lose money, you'll eventually need to know how much you spent in order to calculate your gain or loss.
Don't report capital gains until you dispose of some portion of the investment. If you don't sell any Bitcoins all year, then you don't have to report anything on your tax return. Just keep track of your purchase price for any units you own and wait for the right time to sell. When you do sell some (or all) of your Bitcoins, then it becomes a taxable event that gets reported on your tax return at the end of the year. Make sure to keep records of how much you sold, and then bring all your documents related to the purchase AND the sale of your investment to your tax advisor to include on your personal tax return at the end of the year.
Don't get creative. If you believe you've stumbled across a great loophole, please give your Liberty Tax Service office a call first to discuss your plan, because if it sounds too good to be true, then there's probably a rule against it. An example, you ask? A capital gain is “realized” when you sell investments, trade them, give them away, or otherwise dispose of the asset. As soon as you dispose of those units, it gets reported as capital gains and losses on your next tax return. If you “sell” an investment at less than Fair Market Value, then you're taxed on the full Fair Market Value at the time you gave it away, so be careful not to get cute and attempt to “gift” all your cryptocurrency to family members in an attempt to avoid capital gains tax. You'll pay tax on the Fair Market Value of the capital gain.
Inter-Cryptocurrency trading: Did I just “coin” a new term here? Anyway, a lot of people are confused about what happens when you have some Bitcoins and you want to buy, let's say, some Ethereum (a different cryptocurrency). So you exchange some Bitcoins for some Ethereum. What happens for tax purposes? Well, capital gains tax would apply on the sale of the Bitcoins, and you'd pay tax on the difference between the price you paid for the Bitcoins and the Fair Market Value of the Bitcoins at the time they were exchanged for the Ethereum. And then you would report another capital gain/loss at the time you sold/exchanged/disposed of the Ethereum. Many people incorrectly believe you only have to report the gain/loss at the time you convert your cumulative cryptocurrency account back to Canadian dollars (in other words, cash in on your investment). But that's not the way the tax rules work in Canada. It's exactly the same thing if your stock broker sells 100 shares of IBM and then buys 80 shares of Microsoft with the proceeds. You have to pay tax in the year of each individual gain, even if the profits of your investment have been entirely reinvested in another product.
Track everything in Canadian dollars. This will help make things more obvious, and the Canada Revenue Agency requires you to report everything in Canadian dollars anyway. Bringing everything back to the Canadian dollar as a baseline might help keep things clear and ensure you have adequate records at the same time. For example, let's say you originally bought $100 of Bitcoin and you wanted to exchange half your Bitcoin for Lightcoin (yet another cryptocurrency). So you go to your trading platform and make the exchange. We recommend immediately taking a screenshot so you can print (or save as a pdf) the confirmation screen showing the transaction. Then take another screenshot of how much Bitcoin is trading for in Canadian dollars at that exact date/time (if it's not already on your screen). By converting back to Canadian dollars every time you make a purchase or sale of any cryptocurrency and then saving proof of the price in Canadian dollars at the time of each transaction, you'll have the proof you need to show how much you earned at the time of each sale.
Don't forget about your losses. Most people who have invested money have one trade they'd like to forget. But if you sold any investment assets (including cryptocurrency) at a loss, please remember to report that loss on your next tax return. Capital losses can be used to reduce tax on future capital gains but only if you report the losses in the year you incurred the loss. So even though you might WANT to forget about that time you lost a bunch of money on Bitcoin, it's definitely in your best interest to bring all the proof of your loss and report it to your tax advisor while filing your next personal tax return.
Don't hide your investment activities from the Canada Revenue Agency. You'll sleep better at night if you just report your gains/losses accurately on each tax return. Most of the trading platforms where you buy/sell cryptocurrencies now require identification, and considering how often Bitcoin has been in the news lately, you know the government is going to be looking for people who “forget” to report their profits. But more important, we Canadians are fortunate enough to live in a great country, and reporting and paying tax fairly helps pay the bills and provide for the future.
Disclaimer: This article is intended to provide generalized financial information. No part of this article is intended to provide investment, legal, professional, or personalized advice. Liberty Tax Service does not endorse or promote any investment activity. For personalized advice on your taxes, your investments, and the law, you should seek the assistance of a professional who knows your particular situation.