This is a question we get a lot. And, well, we hate to get to the punchline in the second sentence of a blog post, but, the answer is: yes.
Some of you are probably scratching your heads and thinking: “But isn’t crypto decentralized? Isn’t it free of government control? Isn’t it anonymous?”
Yes and no.
The reality is that while many cryptocurrencies are technically capable of being those things, the people who use, trade and buy them are still beholden to the laws of the countries they reside in. And in Canada, it’s very clear that crypto is subject to taxation by the Canada Revenue Agency (CRA).
How much tax do you pay on your crypto?
In Canada, crypto is treated like a commodity for tax purposes. This means it’s considered capital property like stocks, bonds, or a house. How much you get taxed will largely depend on if the CRA views your crypto transactions as capital gains or business income.
If it’s the former, you’ll have to pay capital gains tax on half your net capital gain whenever you sell, swap, spend, or gift crypto. If it’s the latter, you’ll have to pay income tax on any profit you get from your crypto transactions.
Unfortunately, there isn’t a black and white answer as to how the CRA determines this—as per their own website, they say they decide on a case-by-case basis. (1) However, the CRA suggests that the following four indicators are good signs that you’re operating as a business:
- You carry on activity for commercial reasons and in a commercially viable way;
- You undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory;
- You promote a product or service; and/or
- You show that you intend to make a profit, even if you are unlikely to do so in the short term. (1)
So, as a general rule, the more active you are buying, selling, trading, and receiving crypto, the higher likelihood your crypto earnings will be viewed as business income.
Is there any crypto I don’t have to pay taxes on?
When you buy crypto with fiat currency, hold it, move it between your own digital wallets, or are gifted it, you don’t have to pay taxes. We know, it’s not a particularly inspiring list of exemptions. You’re still going to have to pay taxes on the vast majority of your crypto transactions. But even though you can’t hold cryptocurrency in registered tax-sheltered accounts (e.g., TFSAs and RRSPs), there are ways to shelter crypto earnings from income tax.
Investing in tax-sheltered spot crypto ETFs
Spot crypto ETFs can give you the chance to have your cake and eat it too. Because they accurately track the spot price of the underlying asset, investing in them can have similar effects to your portfolio as buying and holding actual crypto.
However, unlike the Bitcoin or Ethereum you hold in your digital wallet, spot crypto ETFs are fully regulated financial instruments that are treated like any other ETF. This means you can purchase them through your tax-advantaged investment accounts like your TFSA, RRSP, or RESP. This will drastically reduce the amount of tax you’d pay on your crypto investments had you been buying actual Bitcoin and Ethereum.
Crypto tax roundup
Unfortunately, you are going to have to have to pay taxes on your crypto profits. Not doing so is leaving yourself open to some potentially nasty repercussions from the CRA. However, there are options available for investing in crypto that can mitigate how much tax you will owe at the end of the year.
—Haan Palcu-Chang, Crypto Specialist
(1) “Guide for cryptocurrency users and tax professionals,” Canadian Revenue Agency: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html
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