Because cryptocurrencies are still relatively new, many Canadians who have not fully investigated how they work, effective strategies, and the risks involved may have been reading the headlines and hearing the excited chatter about enormous returns and are seeking advice from investment professionals for better insights into the world of blockchain technology.
However, many don’t know to speak to an expert about how investing in crypto affects their tax obligations until they have to seek one out to help them solve issues regarding crypto tax. The CRA was also forced to play catch-up and write regulations and set up enforcement systems quickly, and as a result, tax laws regarding crypto-income reporting are confusing and complex, and many taxpayers are reporting their crypto activities incorrectly.
Determining Crypto Taxation Status
If you haven’t already, you should speak to an expert in both tax law and crypto. Their first step will be to help you determine and justify your taxation status.
In Canada, every crypto transaction you make, whether it’s buying, selling, trading, or even using crypto to purchase goods or services, is subject to taxation. The problem is, the CRA will determine that an individual’s crypto activities are technically business transactions, which have different reporting requirements and taxation rates.
Unfortunately, activities are assessed on a case-by-case basis to determine if revenue generated from those crypto activities is business income or capital gains. This is why it’s critical to consult a professional before you file your taxes to know which reporting method applies to you.
A crypto-tax professional can also provide invaluable guidance that can maximize your ROI and find ways to reduce your overall tax obligations.
Calculating Capital Gains and Losses
For casual traders, capital gains tax is applicable when you dispose of your cryptocurrencies. This includes selling your coins for fiat currency or exchanging them for other digital assets. To calculate your capital gains, you’ll need to determine the cost basis of your assets, which is the original purchase price in Canadian dollars.
The formula for calculating capital gains is relatively straightforward:
Capital Gains = Selling Price – Cost Basis
Keep in mind that capital losses can be used to offset capital gains, reducing your overall tax liability. It’s essential to keep track of your losses as well, as they may be carried forward to future tax years.
Reporting Business Income and Expenses
For crypto traders operating as a business, accurate accounting is even more critical because the consequences are more severe. You must report your business income from trading activities as part of your regular income tax return. You are, however, allowed to deduct legitimate business expenses associated with your crypto trading operations.
Business expenses may include trading fees, exchange commissions, hardware and software costs, as well as accounting and legal fees related to your crypto business. Properly categorizing and documenting these expenses is crucial to maximizing deductions while avoiding red flags that could trigger an audit.