What you should know about cryptocurrency tax in Canada

The reality is, if you buy, mine, trade, cash out or gift crypto—or even use it to purchase or sell goods or services—you need to track that activity and declare (and pay tax on) any resulting income or gains on your annual tax return. And, since all crypto activity is recorded on a public blockchain ledger, the CRA could potentially ask cryptocurrency exchanges for their client information.

“I always caution people to make sure they’re reporting all of their income and gains on their tax returns,” says Maneisha Sandhu, a chartered professional accountant and business advisor with Sandhu & Company in Vancouver. During an audit, the CRA can investigate previous tax years, she adds. “The penalties and interest on unreported income can really add up.”

Unfortunately, figuring out how to report your crypto earnings isn’t always straightforward, since the way they’re taxed depends on your activities and circumstances. Here’s what you need to know.

How does the CRA view cryptocurrency?

In 2014, the Bank of Canada did an analysis of cryptocurrency and determined that it does not meet the definition of “money” and is not a true currency like Canadian dollars or euros. The CRA subsequently issued a guide explaining that, for tax purposes, it generally treats crypto as a commodity, like oil or gold. As such, any earnings from transactions involving cryptocurrency are generally treated as business income or as a capital gain, depending on the circumstances.

The distinction is important because business income is fully taxable, whereas only part of capital gains are taxable: as of June 25, 2024, the inclusion rate for individuals is one-half (50%) on the first $250,000 of a capital gain, and two-thirds (66.67%) on any portion beyond $250,000. The inclusion rate for corporations and trusts is two-thirds (66.67%) on all capital gains.

In other words, if you made $100 from crypto activity, you’d pay taxes on the full amount if it’s considered business income, but you’d pay tax on only $50 if it’s considered a capital gain. (And if you lost money on crypto, you might be able to claim a loss—but more on that below.)

When is crypto considered business income?

If you operate a business—say, you’re an independent contractor—and you receive payment in crypto, then your earnings are clearly business income. The amount of income is determined based on the fair market value of the cryptocurrency on the day(s) when you received payment.

If you mine cryptocurrency, this could be considered a business or a hobby, depending on the nature of your activity—the CRA decides on a case-by-case basis. Either way, if you sell what you’ve mined, that income is taxable. Staking crypto may also have tax implications.

Even if you’re simply buying, trading and selling crypto as an investment, the CRA might still view your earnings as business income—especially if this is something you do frequently with the intention of turning a profit.

Some of the factors the CRA considers in determining whether investment gains count as business income include:

• Frequency of activity
• How long the assets are held
• Intention when assets were purchased
• Amount of time spent on the activity
• Level of knowledge required to conduct the activities

“Identifying your earnings as business income or capital gains is probably the most important reporting decision when it comes to cryptocurrency,” says Riley Storozuk, advanced financial planning manager at IG Wealth Management in Winnipeg. If you’re not sure whether your crypto earnings are business income or capital gains—or how to figure out crypto taxes—consult a tax professional.

How is crypto taxed in Canada?

As is the case with other types of capital investments, you only report gains or losses in the tax year that you dispose of them—in other words, when you cash out or trade your holdings. So, if you buy and hold cryptocurrency, it’s not a taxable event. Same goes if you send crypto from one exchange to another, assuming both wallets are yours. “That’s the only major crypto transaction that’s not taxed,” says Storozuk.

All other crypto transactions, including trading one cryptocurrency for another, cashing out your coins, buying goods or services, or gifting crypto to charity, friends or family, are taxable events. Any increase in the value of your crypto between the time you got it and when you disposed of it is a capital gain (or business income, as explained above); any decrease in value is a capital loss (or business income loss).

As for crypto ETFs, which hold either crypto coins or shares of cryptocurrency-related companies, they follow the taxation rules for securities. If you hold crypto ETFs in a registered account, such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA), however, their growth is tax-sheltered.

Crypto record-keeping tips

You must keep detailed records of all your crypto activity for six years, as the CRA can request to see them at any time. For each transaction, include a date and description (e.g., purchase, transfer or trade), the type of cryptocurrency and its value at the time. (View the CRA’s list of crypto records to keep, including expenses related to crypto mining.)

“If you’re using a coin-based exchange, you should be able to pull all that information by looking at your blockchain ledger,” says Maneisha. If you’re using multiple exchanges—making it difficult to track all of your activity—you could use an app such as Crypto Tax Calculator to aggregate the data, she says.

Working with a tax professional can help ensure the tax treatment of your transactions is being accounted for correctly and the positions you’re taking are reasonable, says Maneisha. “This is especially helpful in the event of an assessment or audit by the CRA.”

How to report crypto on your income tax return

If you’ve determined that your crypto earnings are considered business income, you’ll need to complete form T-2125, Statement of Business or Professional Activities. You may want to consult with a tax pro, as well—if you’re running a crypto business, you should be able to deduct a variety of business expenses, such as subscriptions, memberships, your internet connection and expenses related to your home office. “Only the business portion can be deducted,” says Maneisha, “not the personal-use portions.”

If your business income from crypto (after expenses) is in the negative, it’s considered a non-capital loss, which can be deducted from any other sources of income you had that year (including employment or investment earnings) to lower your taxes. If you don’t have enough income in total to make use of the loss deduction, you can carry back non-capital losses up to three years and apply them to previous years’ tax returns, or carry them forward up to 20 years to reduce your taxable income in the future.

Capital gains or losses are reported on Schedule 3 of your personal income tax return. Keep in mind that, as with other investments, capital losses can only be used to offset capital gains. Those gains need not be from other crypto investments. “You can harvest losses from one sector to offset gains in another,” says Storozuk.

Finally, be aware of the superficial loss rule, also known as the 30-day rule. “If you buy crypto—or stock—and sell it at a loss, and you, or an affiliated person, such as your spouse, buy it back within 30 days, then it’s not considered a loss for tax purposes,” says Maneisha.

Is there any way to shelter crypto earnings from income tax?

In a word, no. “You can’t hold cryptocurrencies in registered tax-sheltered accounts, such as RRSPs and TFSAs,” Maneisha says. If you want to speculate in crypto markets within such accounts, you could opt for crypto ETFs and other related investments instead. (Learn more about crypto ETFs and registered accounts.)

Are NFTs taxable, too?

Yes, non-fungible tokens (NFTs) are taxable, and the CRA will consider the same factors that it does when assessing crypto activity. Again, keep detailed records of your transactions and consult a tax pro if you need guidance.

If you’ve never reported your crypto earnings to the CRA, you may be on the hook for unpaid taxes, penalties and/or interest on your capital gains or business income. Voluntarily correcting your tax affairs may help you avoid or reduce these charges.

One last thing to note as you’re prepping your tax return: The CRA won’t accept payment in cryptocurrency. So, if you do owe taxes this year, make sure to have enough cash on hand to remit your payment. “That has been shocking to a lot of people I talk to who have all of their wealth/liquidity tied up in crypto,” says Maneisha. “They didn’t realize they’d have to cash out to pay their taxes.”

Read more about crypto:

• Private equity, private debt and more alternative investments: Should you invest?
• Mission digital: How Coinbase is reshaping Canada’s crypto landscape
• What is bitcoin halving in 2024?
• 10 common crypto scams and how to avoid them