Crypto is Not Exempt from CRA’s Scrutiny: Understanding Cryptocurrency Taxes in Canada
Initially, individuals considered cryptocurrency investments and transactions as separate from their conventional income due to their non-fiat nature. However, the Canada Revenue Agency (CRA) considers cryptocurrency taxable and requires reporting of such activity during tax season. While the CRA‘s cryptocurrency tax regulations are not always straightforward, failure to report your crypto activity can lead to penalties. Depending on whether the investment is classified as a capital gain or business income, you will pay either Capital Gains Tax or Income Tax.
Can the CRA Trace Your Cryptocurrency Assets?
The Canada Revenue Agency (CRA) has announced its collaboration with various cryptocurrency exchanges to track Canadian investors’ crypto activity and ensure they pay the appropriate amount of taxes. Although the CRA has not disclosed the names of the exchanges, it is working with all major Canadian platforms, including Coinsquare, Coinbase, CoinSmart, and Crypto.com. Additionally, the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) shares information with the CRA to investigate tax evasion and money laundering.
While the tax regulations on cryptocurrency may not be clear, it is essential to report crypto taxes accurately to stay compliant. Even if the CRA is not yet aware of all your crypto investments, failing to report them could lead to significant complications in the future.
Understanding Cryptocurrency Taxation in Canada
The Canada Revenue Agency (CRA) categorizes Bitcoin as a commodity and taxes it as either income or capital gains. If taxed as income, you are required to pay income tax on the entire amount of your crypto transaction proceeds. However, if the transaction is taxed as a capital gain, you are liable to pay Capital Gains Tax on 50% of the profits.
Determining whether your crypto investment is subject to capital gains or business income tax is crucial to avoid potential complications. Incorrect categorization could lead to penalties and other issues.
Business Income or Capital Gain: How the CRA Determines Taxation on Cryptocurrency
The Canada Revenue Agency (CRA) assesses each investor’s cryptocurrency activities to determine whether it constitutes business income or capital gains. It is possible for an investor’s business income to be taxed while their capital gain from subsequent transactions may be exempt. This can make determining how to report crypto transactions a confusing process.
Thankfully, the CRA has established some guidelines to follow. The following are common indicators that your cryptocurrency activities constitute business income:
- You engage in cryptographic activity for monetary gain
- You promote your business or product with cryptocurrency, such as offering it as a giveaway
- You demonstrate a desire to profit from your crypto activities
- You participate in cryptographic activities regularly or repeatedly
Many Canadian crypto investors may earn business income rather than capital gains, depending on their level of activity. Consulting with a Canadian accounting firm can provide expert guidance on the taxation of your investments.
Tax Implications of Cryptocurrency Capital Gains in Canada
Since cryptocurrency is classified as a capital asset, any sales, trades, spending, or gifting of it will incur capital gains tax. Examples of bitcoin transactions that may trigger Capital Gains Tax include selling it for fiat currency, exchanging one form of crypto for another, using it to buy or sell products and services, or giving it as a gift.
In Canada, capital gains tax on cryptocurrency is only applied to the earnings made from selling, trading, spending, or gifting it. As a Canadian citizen, you will only have to pay capital gains tax on half of your net capital gains each year.
There are no specific capital gains tax rates for cryptocurrency in Canada, as they are taxed at the same rate as federal and provincial income taxes. Half of your capital gains are taxable, regardless of whether they are short-term or long-term.
As tax regulations regarding cryptocurrency in Canada can be complex, especially for business owners, it is advisable to consult a tax professional for guidance. If you need assistance, contact us today to discuss how we can help you navigate the tax implications of your cryptocurrency transactions.