Too often in conversation have I heard false statements like “cryptocurrency is only taxable when you convert to cash.” As part of the process of becoming a legitimate and accepted asset class, governments are becoming increasingly involved. It is important to understand tax that may be applicable to your Cryptocurrency. Failure to report taxable income and capital gains could result in serious consequences.
While we are not qualified to provide financial or tax advice, this article will provide a summary of Canadian cryptocurrency tax as we understand it. If you are looking for tax advice we recommend contacting a qualified tax advisor or reading the CRA Guide for cryptocurrency users and tax professionals where we have sourced our information.
Capital Appreciation
Under normal circumstances, when you dispose of cryptocurrencies for more or less than paid you to incur a capital gain or loss. When you incur a capital gain you will be liable to pay capital gains tax. Any losses you may incur can be netted off against gains to reduce your tax payable. In Canada, only half of the net capital gain is subject to tax. If in a given year you have a net loss you can carry forward the loss to future years.
There is a common myth that cryptocurrency is only taxable when you convert it back to cash. This is not true. Cryptocurrency gains and losses are taxable at disposal. A disposal can be any time cryptocurrency changes hands whether this is a gift, an exchange for other cryptocurrencies, or even when you spend it. While this is not a complete list, any of the above scenarios are considered taxable events and you will be responsible for reporting any capital gains or losses on your income statement.
Under Canadian tax law, transacting with cryptocurrency whether, for cash, other cryptocurrencies, or goods and services, the CRA will treat it as a “Barter Transaction.” what this means is that when you dispose of your cryptocurrency you will use the fair market value in Canadian dollars at that time to assess your capital gain or loss.
If you are conducting business with cryptocurrencies your income and gains may be subject to business income rules instead of capital gains rules. For more information, we recommend reading the CRA Guide for cryptocurrency users and tax professionals as our research is tailored for non-business users.
Cryptocurrency Mining
The CRA has labeled cryptocurrency from mining as “business-like income”. If you mine cryptocurrency, even if not intending to conduct a business, any income will be taxed at your ordinary income rate and will not receive the 50% capital gains tax exemption. If you conduct mining in an organized and business-like manner you may be able to deduct reasonable “current” costs. For rules on tax deductions that may apply to you, we recommend speaking with a professional tax advisor or referring directly to the CRA website on business expenses.
Interest & Rewards
Within the DEFI space, there are many ways to earn rewards or interest on your cryptocurrency. The CRA has not currently specified treatment for rewards from staking, interest from lending protocols, or other rewards such as signup or referral rewards. Based on treatment in other countries, and treatment of similar assets such as bank interest or dividend income, it is assumed that interest and staking rewards should be treated as ordinary income and taxed at your ordinary tax rate. You should track the value of cryptocurrency rewards at the time of receipt and plan to pay tax on this amount. Any appreciation or depreciation on cryptocurrency rewards after the time of receipt will be treated under capital gains rules at the time of disposition.
Example/Summary
Assume you invested $100 in ETH. You decided to keep your ETH in a wallet where it earns interest. Halfway through the year, you have received a $10 interest payment in another cryptocurrency, your initial investment in ETH has doubled to $200 and you decide to trade it for BTC. Over the remainder of the year, your bitcoin increases by another 10% and is now worth $220. You have not earned any additional interest or made any other transactions.
- Because you have not sold or traded your BTC there is no tax on any increase in its value.
- When you traded your ETH for BTC you realised a $100 capital gain. This will benefit from the 50% capital gains tax rule. While you report the full amount, only half will be taxed at your ordinary tax rate.
- Your interest received is taxable in its full amount. $10. Any change in market value since you received the reward is ignored until you dispose of it.
- You will have a total taxable amount of $60 ($100 x 50% + $10) which will be taxed at your ordinary tax rate.
