With the explosion of Bitcoin, Ethereum, and other cryptocurrencies that exist or will exist, more and more people are starting to invest in this type of currency. These products are not exactly new, but they have been making headlines for their vast gains and losses.
If you invested early enough, you could have ended up making up thousands or even millions back. As with any hot investment, many Canadians want to jump on the bandwagon so they too can make a fortune. Regardless of how much profit these investments make, they are going to have to deal with the tax code eventually. Here are some common questions and scenarios that come up with cryptocurrencies in Canada and how to address them if you are new to the market.
Taxing Cryptocurrency in Canada
Cryptocurrency is taxed like other investments in Canada. Half of the gains are taxable and added to your income for that year. So, if you bought $1,000 of cryptocurrency and sold it for $3,000 later, you would have to report the capital gain of $1,000 since the difference is $2,000 and $1,000 is half of that. The gain would be added to your income and taxed at your marginal tax rate.
Note that this situation refers to traditional buy and hold investors. If you are a high-volume trader, i.e. someone who holds cryptocurrencies for a short time or day trades them, the CRA might consider it a business instead, and you will need to file your taxes accordingly.
Trading Cryptocurrency in Your RRSP and TFSA
Investors will always attempt to shield themselves from taxes with any potential capital gain. That is why you can not transfer any Bitcoins you currently have into your RRSP or TFSA. Cryptocurrencies run on their exchange, which does not tie other accounts in that are tax-friendly.
Purchasing Assets or Cryptocurrencies with Cryptocurrency
You are obligated by law to keep records of your trades. If you did not keep records, you will need to use your best judgement and hope the Canada Revenue Agency (CRA) does not audit you.
For example, if you bought one Bitcoin initially for $100 but if its market value increased to $15,000, you might decide to use that Bitcoin for a good or service. If a contractor agrees to renovate your home for that Bitcoin, both of you are accountable for taxes. The original Bitcoin owner pays capital gains on $7,450, which half of the difference of $14,900, while the contractor is still required to report the income of $15,000.
When trading full amounts of cryptocurrency, it is easy to track expenses. But, if you purchase cryptocurrencies at different prices at different times, you should keep a log of all of those transactions and calculate your adjusted cost when selling later.
If you are merely moving your cryptocurrency from one wallet to another, i.e. from GDAX to Coinbase, that would not be considered a taxable event. As long as you have not sold any cryptocurrency through this process.
Although, there might be some tax implications. For example, if you paid a $10 transfer fee, that would be a transaction cost that you could later subtract from your capital gains. The same rule applies to any expenses you incurred from buying or selling cryptocurrency.
Reporting Cryptocurrency Gains
If you fail to report your gains from cryptocurrency, that would be considered tax evasion, which is breaking a law that could get you sent to prison. If you fail to report your taxes or you file a fraudulent claim, the CRA could charge you penalties and interest on outstanding amounts.
If you are unsure about how to calculate taxes on your cryptocurrencies, contact S&W Chartered Professional Accountants. We can guide you through the process and file your taxes on your behalf so that you do not get hit with any fines.