Bitcoin gains are taxable in Canada based on the guidelines of the Canadian Revenue Agency. Bitcoin price must be converted into CAD at the time of the sale to determine the value of your gains.
Given the volatility of Bitcoin, it is essential to maintain accurate records of all the details of your Bitcoin transactions. When you pay capital gains tax on your Bitcoin sales, the value of your Bitcoin is based on its value in Canadian dollars at the time of the transaction.
By the time you may file your taxes, Bitcoin’s value has already increased. If you do not have records to prove the value of your BTC at the time of the sale, you could end up paying more capital gains than you needed to.
Capital gains are owed on your BTC only if you sell your BTC and earn a profit. For example, if you sell your BTC for $75,000, and you paid $50,000, then you must report capital gains on the $25,000 profit.
Because the CRA treats cryptocurrencies just like securities, if you sell your BTC at a loss, this qualifies as a capital loss. In the case of a capital loss, that amount is used to offset your overall taxable income. And it is possible to carry losses back for up to 3 years, which also means that you can carry losses forward.
When Are Gains Taxable?
It is important to distinguish between capital gains, business income, and asset appreciation. The CRA treats most cryptocurrency transactions as taxable. Therefore, it is necessary to demonstrate to the CRA how you use your cryptocurrencies.
If you run a business that accepts cryptocurrency, that business is taxed in the same way as a business that accepts barter transactions. The same is true for those who regularly trade and profit from their cryptocurrency.
However, you are not taxed on the appreciation of your cryptocurrency. The difference is between realized or unrealized gains. Realized gain is when you sell your BTC for more than you paid and earn an income. In contrast, unrealized gains are not taxable.
For example, if your BTC are worth $50,000 CAD in January and then increases to $75,000 in December, you do not need to report the appreciation of $25,000 as taxable income.
Capital Gains Rate of Taxation
Only 50% of your capital gains are taxable. If you earn $25,000 from the sale of your BTC, only $12,500 of that is taxed. To determine the actual income tax rate for the year, you need to include your entire annual income. The final rate of taxation is determined by your total income and the province in which you reside. Each province in Canada has different income tax rates.
Cryptocurrencies like BTC are determined based on fair market value in CAD. A knowledgeable estimate of the value determines fair market value. That means that if you were to sell your BTC on the same day of the estimate, the value is the price you would be able to get. Especially with cryptocurrency, this will vary. For this reason, it is important to keep records of all of your BTC exchanges; for both other cryptocurrencies or fiat currencies.
Fair market value is not market value, and rather it is an intelligent estimate made by a knowledgeable source. If you are selling your BTC, a good way to determine the fair market value of your asset is to use the values of exchange for CAD determined by a cryptocurrency exchange.
Criteria for Capital Gains
Bitcoin and other digital assets are not considered legal tender in Canada. However, for taxation purposes, they are treated as securities. Not all cryptocurrency transactions are taxable, but the profitable sale of them is. Therefore, it is best to keep detailed records of how you use and sell your cryptocurrency, as this will determine how they are taxed.
It is also important to note that capital gains are treated differently than business income. If you buy and sell cryptocurrency regularly, the CRA treats this as a business, just like earning an income as a traditional asset trader. If that is the case, then you must report your BTC gains as business income.