If you’re making money in any cryptocurrency, like Bitcoin or Ethereum, you may be wondering how to manage that income when filing your taxes. Although the currency is decentralized – meaning it belongs to no central bank – any profits made in cryptocurrency in Canada are taxable in the year it’s earned.
Here is what you need to know about cryptocurrency and the taxman.
How the Canada Revenue Agency (CRA) views cryptocurrency
The CRA does not see any cryptocurrency as legal tender, instead it treats cryptocurrency as a commodity for purposes under the Income Tax Act. Meaning you are taxed either on the capital gains or as business income.
Cryptocurrency is taxed as capital gains
If you are using cryptocurrency to invest you will be taxed on the capital gains when you sell it. The CRA says “Capital gains from the sale of cryptocurrency are generally included in income for the year, but only half of the capital gain is subject to tax.” Simply put: 50% of your crypto gains are added to your income and taxed at your marginal tax rate (you’re only being taxed on your investment gains, not the entire value of your crypto holdings).
It’s important to know what the value of the cryptocurrency was in Canadian dollars on the day you purchased it and on the day you sold it, in order to understand what amount is subject to capital gains.
How crypto is taxed as business income
If you are using cryptocurrency to buy and sell goods in your business your gains (or losses) will be treated as business income.
Here is how the CRA defines if you are running a business using cryptocurrency:
- you carry on activity for commercial reasons and in a commercially viable way
- you undertake activities in a business-like manner, which might include preparing a business plan and acquiring capital assets or inventory
- you promote a product or service
- you show that you intend to make a profit, even if you are unlikely to do so in the short term
It’s important to keep good records of what the value of the cryptocurrency was the day you were paid for your business. As well, record how much cryptocurrency you used (and its value in Canadian dollars) for any purchases you made to run your business.
Some examples of cryptocurrency businesses are:
- cryptocurrency mining
- cryptocurrency trading
- cryptocurrency exchanges
How cryptocurrency works when you’re paid as an employee
If you work for a company that pays you in any cryptocurrency you must keep a record of when you were paid and what the cryptocurrency was worth in Canadian dollars on that day. You will need this information when you file your tax return. As well if you buy something using cryptocurrency that is considered a disposition of cryptocurrency, you will have to show that on your return as well.
According to the CRA, this is how you should maintain the following records on your cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party (even if it is just their cryptocurrency address)
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs
How GST/HST is calculated on cryptocurrency
If you are a business owner or self-employed and you trade your services or products for cryptocurrency the GST/HST is calculated based on the fair market value of the cryptocurrency at the time of the exchange. The CRA will expect you to remit this amount depending on your payment schedule.
How to grow crypto investments tax-free
While you can’t hold crypto directly in a TFSA or RRSP, if you are interested in investing in crypto and sheltering your gains, there is technically one roundabout solution. You can buy an ETF in an online brokerage account that follows the value trends of a cryptocurrency and hold the ETF in in a tax-sheltered registered account like your TFSA, RRSP or even RESP. There are several crypto ETFs now available in Canada that you can buy in Canadian dollars. There are fees associated with ETFs and you won’t technically own any crypto, so be sure to do your research before investing.
The bottom line
Cryptocurrency when earned as income is subject to tax. It is the responsibility of the person earning that income to understand what their tax obligations are and declare it on their return. As cryptocurrency becomes more widely used the government will likely adjust the Income Tax Act to reflect the reality of its use. For now, it’s not considered legal tender and therefore requires careful record-keeping for tax purposes.