September 26th, 2018
Guide to Canadian cryptocurrency taxation
Koi Research Group | Last updated March 26, 2018
For most Canadians who do not trade for a living, you are expected to pay tax as a capital gain. If you spend a significant amount of time trading and analyzing the markets without holding long-term, you may be required to file your gains as income.
Currently, there are no distinctions and all cryptoassets are treated equally in regard to profits made from the activity. In the future we may see distinctions between cryptocurrencies, crypto-commodities, cryptosecurities and other digital tokens when it comes to tax.
The Swiss regulatory authorities released differentiations on types of tokens, defining “payment” “asset” and “utility” tokens. We can likely expect a similar classification from the CRA in 2018. Since cryptocurrencies are not considered a legal currency in Canada, all payments made using bitcoin or other cryptocurrencies are considered barter transactions and the tax implications are derived from the fair market value of the barter.
Although mining may be viewed as a hobby, the CRA considers any profit-making activity a business and as such, the hobbyist miner should claim the miner and all associated costs as an expense and claim the net income as personal income.
Income vs Capital Gains
The central issue up for debate is whether to consider cryptocurrency profit/loss as income, or as capital gains. There is no black and white answer to this; it depends if you consider yourself a short-term trader, or a long-term investor. If you fall under the category of trader, you will likely be taxing your cryptocurrency gains as income, whereas a long run investor will be claiming their tax as capital gains.
To evaluate if you are a short-term trader who would pay taxes as income, it is best to ask yourself if you fall under the factors below from TaxTips.ca:
- frequent transactions, extensive buying and selling of securities
- short periods of ownership
- some knowledge of or experience in the securities markets
- security transactions form a part of the taxpayer’s ordinary business
- a substantial portion of the taxpayer’s time is spent studying markets and investigating potential securities purchases
- security purchases are financed primarily with margin or debt
- the taxpayer has advertised or otherwise made it known that he is willing to purchase securities
- securities purchased are speculative in nature or do not pay dividends
Based off these factors that would classify a trader, many of us likely do not fall into this category, and can instead file our taxes as capital gains. With this in mind, lets run over a quick example of how the CRA treats capital gains tax.
Capital Gains Tax
In short, 50% of your capital gains are taxed, and are taxed at your marginal income tax rate.
For example, let’s say you bought for $500, sold at $600, and now you have $100 of capital gains to declare. For 2018, your first $46,605 in income is taxed at 15%, so for this example, you would pay:
($100*50%)*15% = $50 * 15% = $7.5
In this scenario you would keep $92.5 of that $100 gain and report $7.5 in capital gains.
What if your gains are held in cryptocurrency and you know the dollar value because an app like Blockfolio or Delta calculates it for you?
In general, any gains you have made but have not withdrawn only exist as “paper gains.” You do not have to report unrealized gains. Whether it is foreign currency, stocks, or cryptocurrency gains that you have not yet cashed, you do not have to report these gains because you have no profit – a form of taxable income – to report. Further reading can be found starting on page 5 this Canadian Tax Foundation report.
What do I tax?
You should organize and track all of your withdrawals from cryptocurrency/bitcoin back into fiat. You should be able to find this information in your trade history on the cryptocurrency exchange you use. Based on what is written above, these are the amounts you will be paying capital gains tax on.
What about claiming it as foreign currency?
What if your cryptocurrency gains have exceeded $100,000? There have been some mentions online that it is possible to consider cryptocurrency as a foreign currency, which you would have to declare as foreign currency/property if it exceeded $100,000. This approach does not need to be pursued by investors for two reasons. Firstly, your tax return will actually ask if the cost of that foreign property was over $100,000 or not. Many investors have invested less than $100,000 in the cryptocurrency space, which immediately makes this irrelevant for them. Secondly, since cryptocurrency is not tied to any government whatsoever, it does not meet the criteria of “foreign property” and we feel that making an argument for it holds less credibility and backing than filing your taxes as capital gains.
Download PDF guide: Canadian crypto tax document Koi_Metrics 03.26
The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders across the country. NCFA Canada provides education, research, industry stewardship, and networking opportunities to over 1600+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry in Canada. For more information, please visit: ncfacanada.org