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Taxpayers who trade crypto must report every single gain or loss from selling, buying, or trading.
Bitcoin, Ethereum, Tether, NFTs — regardless of your preferred blockchain investment, it’s undeniable that their popularity as an investment vehicle has exploded over the past decade. And while crypto’s high volatility compared to traditional securities attracts financial risk-takers, it has also attracted the attention of the CRA.
At its inception, cryptocurrency sought to provide added privacy to its users via a more opaque alternative to fiat currency. One unfortunate side effect of crypto’s lack of oversight is that it provides criminals an additional avenue to launder money. After pressure from governments and tax authorities, cryptocurrency exchanges such as Coinbase and Binance implemented transparency measures, including a requirement to report any and all crypto-related “taxable events” incurred by the user. These taxable events include:
- Selling or exchanging crypto for fiat currency
- Selling or exchanging one type of cryptocurrency for another (i.e., exchanging Bitcoin for Ethereum)
- Spending crypto on goods or services.
How Are Cryptocurrency Transactions Taxed?
The CRA does not consider cryptocurrency to be legal tender — rather, crypto falls under the same tax laws as most commodities. This means taxpayers who trade crypto must report every single gain or loss from selling, buying, or trading. If the cryptocurrency’s value at the time of a transaction or sale exceeds its value when initially purchased by the taxpayer, the taxpayer must report the transaction as either a capital gain or as business income, depending on specific circumstances.
Business income or capital gain? How to classify crypto gains
To accurately report crypto transactions, you must accurately determine whether the transaction is considered business income or a capital gain. As the name implies, the transaction will be considered business income if it is made on the behalf of a business or as a result of commercial activity such as cryptocurrency mining.
Whether crypto transactions should be considered business income or capital gains varies on a case-by-case basis. The CRA recommends using their interpretation of Bulletin IT-479R for further guidance. You should also consider talking through your crypto transactions with a tax professional.
Capital Gains Tax Basics
In Canada, capital gains tax is imposed on the profit made from the sale of capital assets, such as real estate, stocks, mutual funds — or cryptocurrency. It’s easy to calculate the capital gain on a specific translation — just subtract the asset's initial cost from the sale price.
Unlike business income which is fully taxable, The CRA considers only 50% of the capital gain to be included in taxable income, so the effective tax rate on capital gains is half of the individual's marginal tax rate. For example, if an individual taxpayer's marginal tax rate is 30%, the effective tax rate on capital gains would be 15%. If you’re unsure what your marginal tax rate is, you can schedule an appointment with your local Liberty Tax pro to learn more about your tax situation.
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PAY LESS ON CRYPTO
To avoid paying more taxes on cryptocurrency, you must avoid incurring a taxable event. In the plainest possible terms, don’t sell or exchange your crypto unless you have reached your goals.
Having TAXiety? We Have the Answers.
It’s no secret — taxes can be a challenge to understand. If preparing to pay capital gains tax gives you TAXiety, don’t hesitate — schedule an appointment with your local Liberty Tax Pro. Let the tax pros at Liberty Tax be your tax resource.