Canada Crypto Tax Guide 2022

If you are planning to buy cryptocurrency in Canada, you need to know the Canada Crypto Tax laws present in the country. This article will break down the latest laws, amendments, and situations regarding crypto tax in Canada.

The Canadian Revenue Agency (CRA)

In fulfillment of the Income Tax Act, The Canadian Revenue Agency, CRA, established a cryptocurrency section to ensure that Canadian crypto investors pay taxes on crypto investments and to conduct crypto audits for tax purposes.

The CRA considers cryptocurrency a digital asset treated as property or a commodity. Using crypto to facilitate payments and trades does not qualify as ‘legal’ tender, and such transactions are considered a barter trade.

Crypto Tax Events 

As per the CRA guidelines, taxable events occur upon the disposition of cryptocurrency. Disposition refers to the giving, selling, or transferring of crypto assets. Common crypto dispositions considered as taxable events include:

• Trade or exchange of one crypto asset for another
• Selling of a crypto asset
• Converting of crypto to government-issued fiat currency
• Using crypto to purchase goods or services
• Giving out crypto as a gift

The Income Tax Act holds that only the bartered transactions, such as the disposition of cryptos, attract income tax implications. There is no tax imposed on simply holding crypto.

The following crypto transactions are considered non-taxable in Canada:

• Holding cryptocurrency
• Transferring crypto assets between wallets
• Buying crypto with fiat currency
• Buying NFTs with fiat currency
• Borrowing

Capital Gains Vs. Business Income

Investors hold crypto assets for capital investment or to earn through short or long-term gains. The CRA reviews specific crypto transactions case-to-case basis, and depending on the conditions, the revenue is categorized as either business income or capital gains. At the same time, losses are either business losses or capital losses.

Business Income

Taxable business income is crypto revenue earned as part of a business operation and is also determined case-to-case basis. Common signs of business income include:

• Publicizing or Promoting a product or service
• Carrying out Commercial activities done in a “viable way.”
•  Plan and Intent to make a profit
• Operating as a business, such as developing a business plan and acquiring inventory.

The CRA considers the “adventure or concern like the trade-in determining cryptocurrency businesses and lists two significant common examples of crypto businesses:

• Cryptocurrency exchange
• Crypto mining operations

Any gain resulting from Crypto activities carried out commercially or for business purposes is considered business income. In this case, the total profits are subject to taxation, unlike crypto capital gains, where only half of the revenues are taxed.

In Canada, different provinces have different income tax rates, with lower rates reserved for income eligible for federal small business deductions. Provinces are at liberty to set the maximum business limits, but most use the federal business limit as a guide. Any business Income above the business limit attracts higher rates. 

Capital Gains

Where the disposition of crypto is not deemed a business income, and an investor earns profits from it, then the CRA considers it a capital gain realized. Capital gains are considered income, but only fifty percent of the revenues are subject to capital gains tax at the personal marginal rate, making classification as capital gains very advantageous.

A capital gain or loss is realized when a crypto asset is purchased as a capital investment and later disposed of. A tax on 50 percent of the profits is imposed in case of a capital gain. The tax payable depends on the federal and provincial marginal tax rates. In case of a loss, one can claim a capital loss on 50 percent of the loss. Capital loss claims only apply to capital gains from other crypto exchanges or investment assets. 

If capital losses exceed capital gains in a current tax year, they are applied against previous gains within the last three years or carried forward on capital gains in future years.

Tax on Crypto Mining

Owning crypto assets is either through purchasing them or mining. An investor must report All income earned from crypto mining.

If one engages in crypto mining as a hobby, the CRA taxes any capital gains made. However, if the mining is frequent and commercial, the CRA treats the income as business income. The income is taxed at the applicable business tax rate if mining is carried out under a registered cryptocurrency corporation. For individuals, sole proprietors, or a partner in a company, the applicable tax rate is the marginal tax rate.

Tax on Gifted Crypto 

Gifting of crypto is considered a disposition of the asset and, as such, attracts a capital gains tax. The capital gains will be the purchase price plus any cost of purchase less the market value of the crypto at the point of gifting.

The recipient is not expected to pay any tax on the gift unless he opts to dispose of the gifted crypto asset. In such a case, the capital gains will be the entire fair market value of the crypto since there was no acquisition cost. Half of this amount is taxable at the marginal tax rate.

Tax on Crypto Exchanges

Purchase of crypto using fiat attracts no tax on a purchase. However, if one crypto is used to purchase another, it is deemed a barter trade and automatically attracts taxes on any gains made. The nature of the transaction determines whether it is a capital gain or income tax. 

Tax on NFTs

The CRA has not outlined guidelines for NFTs taxation. However, NFTs are considered capital property. 

Purchase of an NFT does not attract taxes; however, the disposition of an NFT either through a sale, exchange, or gift results in capital gains tax or business income tax. Half of the gain is taxable if the disposal creates a capital gain. If it is a business income, the total revenue is taxed.

Final thoughts

Capturing crypto tax as accurately as possible is essential to avoid owing the CRA after completing a tax assessment. Understanding the nature of crypto activities and the consequent tax implications is critical in lowering an investor’s tax burden.