*None of the following should be construed as financial or tax advice.
Tax season is dreadful for most Canadians, but it can be even more stressful for those who’ve recently ventured into crypto investing or trading. Let us just say this right off the bat, yes, cryptocurrency whether it’s Bitcoin, Ethereum, or even stablecoins like USDT or USDC are in fact taxable assets. We’re had a significant influx of tax inquiries recently and many clients didn’t even know they had to pay taxes on their crypto gains. So we’ve decided to compile some tips on preparing for crypto tax season in Canada.
This article will hopefully help get you prepared for tax season whether you’re a crypto investor, trader, or just interested in cryptocurrency taxes in Canada.
Pay your taxes!
This should go without saying, but pay your taxes. It’s fine to disagree with how your taxes are spent or be frustrated with how taxes are applied, but not paying your taxes isn’t the solution. Tax avoidance and tax evasion/fraud is a situation you do not want to be in. It can be much more stressful and costly than just doing the work to pay your taxes you owe, and in some circumstances not paying your taxes can wind you up in jail.
If you’ve messed up or forgot to pay or file your taxes properly there’s a program the CRA runs call the Voluntary Disclosure Program where the CRA may grant relief to taxpayers who voluntarily come forward to fix errors or omissions in their tax filings prior to the CRA becoming aware.
Review CRA’s website
When you want to do something right, go to the source. The CRA (Canada Revenue Agency) is who collects and reviews your tax filings and they provide lots of resources on how to do so. However, like most government websites, they can be dry, difficult to navigate, and often just broken.
They do however have a short page for cryptocurrency tax guidance which all cryptocurrency investors/traders should review before filing. It’s not entirely clear for those who have no experience with terms like “capital gains”, “business income”, or the “Superficial loss rule,” but it’s a good place to start.
Keep track of your transactions!
By far the most important thing to do with regard to cryptocurrency and taxes in Canada is keeping a good record of your transactions and trades. Every trade or swap, even if its not to Fiat currency (CAD, USD, JPY), is a taxable event. Buying BTC with ETH is a taxable event and your capital gains will be determined by your cost-basis of the ETH (in Canadian dollars) and the price (also in Canadian dollar) at which you sell the BTC in the future, even if it’s traded for another cryptocurrency or stablecoin.
Good cryptocurrency transaction records include:
- Date for each one of your crypto transactions
- The fair market value of each one of your assets when you bought or sold them
- The amount of tokens you bought, sold, or traded at each transaction
- Cryptocurrency addresses and wallet information
- Cryptocurrency addresses of other parties you’ve traded with
- Exchange records
- Accounting & legal fees
Over the past couple years several websites have made filing your cryptocurrency tax in Canada much easier. Koinly is a very popular one which we have used ourselves. Sites like this allow you to manually important transactions for various wallets and exchange sites using .cvs files. Many of them now allowed you to directly connect the tax software with the exchange you are using with secure APIs allowing trades to be automatically added with all relevant data. While the experience isn’t perfect yet, it can save you several hours of time and mitigate countless hours of frustration.
Understand the difference between capital gains and business income.
One of the most confusing things about cryptocurrency and taxes in Canada is how the CRA will determine whether you should be filing your gains or losses as capital gains or business income. Many clients we’ve spoken to have never considered their crypto gains might be business income because they don’t operate a business or they aren’t incorporated. Even if you have a full-time job doing something other than trading, the CRA may deem your activities with regard to cryptocurrency gains to be business income.
It’s not completely clear how the distinction will be made by the CRA, but they do provide us with some guidance.
“Generally, if disposing of cryptocurrency is part of a business, the profits you make on the disposition or sale are considered business income and not a capital gain. Buying a cryptocurrency with the intention of selling it for a profit may be treated as business income, even if it’s an isolated incident, because it could be considered an adventure or concern in the nature of trade.
If the sale of a cryptocurrency does not constitute carrying on a business, and the amount it sells for is more than the original purchase price or its adjusted cost base, then the taxpayer has realized a capital gain.”
Use your costs
When filing your cryptocurrency tax return remember to include all the costs associated with the transactions such as deposit/withdrawal and trading fees. If using the DEX (decentralized exchange) like Uniswap these costs can really add up and help reduce your taxable income.
If you’ve been trading a lot and are likely deemed to be operating business for income the additional costs you can write-off for your trading can be significant. If you’re operating a business and trading from your home you may be able to deduct a portion of your rent or internet. Additionally if you’re subscribing to any newsletters, premium trading platforms or research sites these costs may be eligible for your return.
Ask for Help
Finally, you’re not alone, definitely reach out for help. There are plenty of tax professionals that are able to help you out, some even specialize in crypto now. Remember, tax professional do not need to understand cryptocurrencies to help you, they may just not have the patience to deal with the complexity and volume of the transactions!
While we do not offer financial or tax advice we can help operationally with software guidance and tutorials. We’ve helped many canadian clients through the complexity of cryptocurrency, investing, and taxes so please contact us if you’re stuck!