Governments all around the globe are still trying to figure out how to tax the quickly developing cryptocurrency market. Canada is not an exception to this cryptocurrency taxes rule. Unfortunately, this results in many crypto investors feeling overwhelmed and befuddled when it comes time to file their tax returns, which can be quite frustrating.
This post will talk all about Canada’s cryptocurrency tax regulations in light of the most recent guidelines from the Canada Revenue Agency (CRA) and the Quebec Revenue Agency (Revenu Quebec). We will cover some of the things that we will cover, including how crypto tax in Canada works, tax reporting, and more.
1. Understanding How Crypto Is Taxed
For tax reasons, the Canadian Revenue Agency (CRA) considers crypto to be a commodity. This implies that depending on whether you are operating “as a company” or just “as a hobby,” any revenue you get from selling and buying cryptocurrency is classified as either business income or capital gain. Similarly, any losses you experience are classified as either business or capital losses for tax purposes.
These two types of income—business revenue vs. capital gains—are taxed differently in Canada. Business income is taxable at 100%, whereas capital gains income is only taxable at 50%. Remember that the overall amount of tax you pay, including crypto tax in Canada, is determined by your tax bracket.
2. Can You Avoid Cryptocurrency Taxes?
There is currently no legal means to avoid paying taxes on Bitcoin in Canada. Despite the fact that cryptocurrency transactions are done anonymously, the CRA has the power to request consumer data from cryptocurrency exchanges. It uses this information to determine who has cryptocurrency-related revenue that should be declared on their tax returns.
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3. When Do You Pay Cryptocurrency Taxes?
There is no taxation associated with merely owning crypto. The majority of the time, investors create taxable events by selling their holdings, also referred to as dispositions. These events include exchanging crypto for other types of crypto or for fiat, buying things with crypto, or giving it to somebody as a gift.
Transferring crypto between wallets is not regarded as a taxable event under the tax laws. When a taxable event occurs, though, you’ll want to maintain track of all of your transactions to quickly determine your cost basis when the time comes.
4. Filing and Reporting
It is vital to keep meticulous records of your financial activities to appropriately submit your taxes. The Canadian Revenue Agency (CRA) suggests that you keep track of the following data for up to six years:
- Dates of all crypto transactions
- The fair market value of crypto when it was bought and sold
- Exchange records
- Wallet information and crypto addresses
- Crypto address of others you have traded with
- Number of tokens for each transaction
The capital gains from your cryptocurrency trades should be declared on Schedule 3 of your income tax return. In contrast, your company income should be reported on Form T2125, Statement of Business or Professional Activities.
5. Am I Paying Business Income or Capital Gains?
It is necessary to pay business income tax if your company is engaged in the Bitcoin trading sector. Some indications that you may be running a company are as follows:
- You are conducting business in a “business-like way,” which may involve developing a company strategy, submitting yearly reports, and making estimates for potential investors.
- You’re attempting to sell a product or service.
- You plan to generate a profit, even if doing so in the short term is unlikely to be successful.
The distinction between being a business and being an individual investor might be difficult to distinguish. Even a single transaction might be required to be recorded as business income if the transaction’s objective was to generate a short-term profit.
If you’re unclear whether your activity should be treated as company revenue or as capital gains, you should speak with a tax specialist for guidance.
6. Understanding Adjust Cost Basis
The Canadian Revenue Agency (CRA) requires you to use the Adjusted Cost Basis (ACB) costing technique to compute your cryptocurrency profits and losses, as opposed to the United States, which lets you use a variety of methodologies such as FIFO, LIFO, or HIFO.
Your ACB is the average cost (in Canadian dollars) of each unit of cryptocurrency at any given point in time. You must compute the asset’s current market value (ACB) for each cryptocurrency you possess. To get the answer, multiply the total cost of all tokens owned by that specific crypto by the number owned by that specific crypto.
7. Can I Pay My Taxes With Crypto?
At this time, it is not feasible to pay taxes using cryptocurrency. Payments may only be made in Canadian dollars at this time. It is possible to pay off your tax debt online using a debit card, a credit card, a wire transfer, or PayPal to satisfy your tax debt.