Unfortunately, Canada doesn’t allow tax-free cryptocurrency cash-outs.
The data it obtains determines who has crypto-related income that should be reported on taxes. So, better get to splitting up your cashouts!
Not to worry, though. In this article, we’ll tell you everything you need to know about how much of your crypto cashouts you are legally expected to pay as taxes, how you can file your earnings, and how to minimize the taxes to have to pay on your crypto capital gains.
It is highly recommended that anyone who wants to invest in cryptocurrency in Canada needs to be aware of the laws. We recommend not getting so carried away splurging your crypto cashouts that you forget the taxes lurking in the shadows.
What is Cryptocurrency?
Let’s be honest; if you consciously found your way to this article, you probably already know what crypto is. But we’ll do a brief overview for the curious newbies.
A cryptocurrency is a digital or virtual currency secured by a kind of technology called cryptography, making it nearly impossible to counterfeit.
Many cryptocurrencies are decentralized networks based on blockchain technology, a distributed ledger enforced by a large network of computers.
A defining feature of cryptocurrencies is that they are generally not issued or controlled by any central authority, rendering them immune to government interference or manipulation. Pretty cool, right?
Cryptocurrencies can be mined or bought from cryptocurrency exchanges. It is a known fact that some eCommerce platforms don’t allow purchases using cryptocurrencies.
Popular cryptocurrencies like Bitcoin are hardly used for retail transactions. However, the increasing value of cryptocurrencies has made them popular as trading instruments. In some cases, they are also used for cross-border transfers.
I Don’t Know About Canada’s Crypto taxes. Where do I Start?
First and foremost, keeping detailed records of your transactions is critical to properly reporting your taxes. You should be taking note of information such as:
- Dates for each crypto transaction.
- The number of coins you bought, sold or traded.
- The market value of your assets when you buy or sell them.
- Crypto addresses and personal wallet information.
- Crypto addresses of parties you’ve traded with.
- Exchange records.
- Accounting fees.
- Legal fees.
For personal crypto earnings, it is important to complete The Schedule 3 Form, which is used for crypto deals and reporting the amounts of gain from them. If you report business earnings, those should be recorded on the T2125 Statement of Business or Professional Activities.
In the case of bitcoin mining, the rules aren’t too different. For those asking, “what exactly is cryptocurrency mining?” it creates new cryptocurrency by solving puzzles.
It consists of computing systems equipped with specialized chips competing to solve math puzzles. The first miner to solve a puzzle is rewarded with bitcoin.
There are two main ways cryptocurrency mining can be taxed: through a hobby or business.
If you’re mining cryptocurrency as a hobby, you’ll have to pay capital gains when you sell your coins. These coins will be classified as new assets with a cost basis of 0 since they were not previously owned. Business deductions aren’t available to hobby miners.
Business mining generates tokens, which should be recorded along with normal company revenue. Related costs may be deducted. An example of such related costs is electricity.
How Can I Pay Less Crypto Taxes in Canada?
Listed below are some ways to reduce the weight of tax when paying cryptocurrency taxes in Canada:
1. Business Deductions
You can cut down associated expenses if you run a business that takes cryptocurrency. For example, electricity costs maybe not be considered.
2. Writing Off Capital Losses
Investors often sell cryptocurrencies that have fallen in value to reduce their overall tax obligation. This is called a capital loss when you sell an asset for less than you paid for it.
Capital losses can be used to offset capital gains and decrease your overall tax burden, so when you sell cryptocurrencies at a loss, you can use the amount of your loss to lowering the taxes you owe on other sources of capital gains.
This is known as tax-loss harvesting and can be a smart way to reduce your tax liability. But there are some rules about what counts as a valid loss, so it’s important to make sure your accounting is done correctly before taking deductions.
Remember that 30 days before or after the sale of a cryptocurrency, you can’t reduce a capital loss if you buy that particular cryptocurrency. The Superficial Loss Rule is what this law is called in Canada. Capital loss cuts have limits according to this law.
3. Cryptocurrency Business Losses
This is good news for people who invest in the running of cryptocurrency itself. Any losses suffered are deductible from your total earnings if you run a crypto establishment. This can also be used to cut down your annual bill of tax.
4. Transaction Fees
Considering the cost of trading and getting cryptocurrency around can assist in cutting down the total capital gains of your investments. If you factor these in, they could be quite useful to you.
What is ACB, and Why is it So Important?
Anybody serious about sorting their cryptocurrency taxes out in Canada should know about the ACB.
The Adjusted Cost Basis (ACB) is the total average cost (in CAD) of each cryptocurrency unit at any given moment, as determined by the current market price.
As instructed by The Canada Revenue Agency (CRA), a cryptocurrency taxpayer is required you to use the Adjusted Cost Basis (ACB) costing method to compute their gains and losses on cryptocurrencies. We would recommend you get right on that.
So, before you panic about your cryptocurrency taxes, stay calm and follow the rules.
You won’t lose any money taking your time studying the technicalities. If anything, you will have a better handle on your gain/loss tax ratios before the inevitable tax audit comes knocking.
The ACB guidelines get very technical quickly. But armed with just a basic understanding of how this works, you can keep your books in order and file your taxes promptly. Is tracking the ACB even worth it? You bet it is. Click here if you want to learn more about ACB.
We now know there are taxes on cryptocurrencies in Canada, so I’m afraid you can’t escape the law, but we’ve also learned how to reduce said taxes thanks to this article.
Being one of the world’s most technologically advanced asset classes, cryptocurrencies have gained a lot of attention over the last few years.
Whether you’re investing in them or trading them, you want to be able to sell them when you’re ready. Taxes shouldn’t discourage you from cashing out.
There is no easy way around paying taxes. Anyone who tells you otherwise is selling something. But if you are a small investor, you can lower your tax bill by following the simple rules explained above.
Remember that this process can save you significant amounts of tax dollars in the long run when done correctly.
Even with all of the benefits suggested above, it can be a risky move for investors. This is because of the volatile nature of cryptocurrencies.
Any adverse market conditions that lead to a decline in cryptocurrency prices could result in significant tax bills for investors if they have not been careful.
As such, it is important to always be mindful of any tax implications of your cryptocurrency investments and seek professional advice if necessary.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
The primary purpose of Money Reverie is to help everyday Canadians make better financial decisions by providing up-to-date financial news and information, reports, product reviews, and government programs.