Wondering How to Navigate Crypto Taxes in South Africa? Read our detailed guide on South African Crypto Taxes!
Wondering How to Navigate Crypto Taxes in South Africa? Read our detailed guide on South African Crypto Taxes!
Curious about crypto taxation in Luxembourg for 2023? Our guide covers everything you need to know about crypto taxation in Luxembourg.
Curious about the future of crypto taxation in Malaysia? Explore our 2023 Crypto Tax Guide for expert insights on crypto taxation in the region!
Are you someone who loves investing in crypto, but barely knows the tax implications these transactions attract?
If you’ve answered that with a yes then you’ve come to the right spot because we’ve curated the perfect guide for you covering all aspects of crypto taxation including DeFi taxation, capital gains tax, income tax, and taxes exemptions. We have also discussed some strategies that will help you reduce your tax bill significantly from this point forward.
Not to mention that this guide will be updated regularly and will accommodate any new guidelines, rules, or legislation enforced by the Canadian tax authorities. Therefore, we suggest you read this blog thoroughly and keep revisiting it to stay updated on new tax updates.
08/06/23: Was Updated to accommodate DAO, Gifts and Donation Taxes
08/06/23: Was updated to accommodate ICO taxes
For tax purposes, the Canada Revenue Agency (CRA) classifies cryptocurrency as a commodity, which means that selling or disposing of such assets results in capital gains or losses. However, depending on the nature of your transactions, you may also be considered as generating business income. If your gains are deemed business income, you will be required to pay income tax on the entirety of those gains. On the other hand, if your gains are categorized as capital gains, you will only need to pay capital gains tax (CGT) on half of the gains.
The determination of whether your transactions are regarded as business income or capital gains is assessed individually by the CRA. It is possible that certain transactions by an individual investor may be categorized as business income, while others may be classified as capital gains.
Typically, if the following criteria are met, your gains will be viewed as business income:
Note that it would be prudent to consult an experienced tax accountant to better understand how your transactions will be viewed from a tax perspective.
In Canada, there are no specific capital gains tax rates for short or long-term crypto investments. Instead, crypto capital gains are subject to taxation based on the prevailing Federal Income Tax and Provincial Income Tax rates. It's important to note that as an individual holding crypto, you will only be taxed on 50% of your total capital gains. However, professional day traders are required to pay taxes on the full 100% of their gains.
Consider the following transactions:
2022/01/05 - Mark Buys 5 BTC for $20,000 each
2022/03/09 - Mark receives 6.25 BTC for mining using professional equipment
2022/05/11 - Mark sells 5 BTC for $22,000 each
Since Mark is not involved in repetitive transactions of the exact nature, the disposal of 5 BTC will attract a CGT instead of an income tax.
Capital Gain on 1 BTC = $22,000 - $20,000 = $2,000
Total Gain = 5 * $2,000 = $10,000
However, since Mark mined the tokens in a business setting using professional equipment to make a profit, the mining rewards will be treated as business income and will be subjected to income tax.
Assuming the value of BTC was $18,000 at the time of receipt
Total Value of Received Tokens = 6.25 * $18,000 = $1,12,500
The answer is yes. So you can safely discard thoughts of not reporting crypto gains on your tax report and consider reporting all your crypto transactions judiciously. Because if that’s not the case, you might end up in legal trouble. Here’s how the CRA tracks crypto transactions:
Crypto assets are not considered a currency and are categorised as property for tax purposes. This implies that any gains made from the disposal of these assets will be considered capital gains. From a tax perspective, this translates to the disposal of capital assets being taxable, and the gains incurred will be subjected to a capital gains tax. The following transactions are considered as disposal by the Canadian tax authorities:
But this is just half the story because you don’t have to pay taxes on all your capital gains. According to the CRA(Canada Revenue Agency), you only pay taxes on 50% of your gains.
Canada doesn't have a dedicated capital gains tax rate nor does it have a short-term and long-term capital gains tax structure. Your capital gains are subjected to federal and provincial income tax. It’s important to note that only 50% of your capital gains are subjected to these taxes. Listed below are the federal income tax rates for the 2023-2024 tax year:
You can view a detailed list of provincial taxes for all the provinces in Canada here.
To ensure a seamless tax filing process at the end of the tax year, it is crucial to maintain a comprehensive record of all your gains and losses. Calculating these gains and losses accurately is essential.
When you dispose of your cryptocurrency assets through selling, swapping, or gifting, you create a capital gain or loss, whether it was intentional or unintentional. This capital gain or loss represents the difference between the amount received from the disposal and your cost basis. If you are unfamiliar with the concept of cost basis and how to calculate it, please refer to the next paragraph. Otherwise, you can proceed to the next section.
Your cost basis refers to the price you paid to acquire a specific asset, which, in this case, pertains to cryptocurrency. For crypto assets, the cost basis is determined by the fair market value of the asset at the time of acquisition, inclusive of any associated fees such as gas fees or transaction fees.
It is worth noting that tokens received from airdrops inherit a cost basis equal to the fair market value of the asset at the time of receipt.
Consider the following transactions:
2022/04/23 - Amber bought 2 BTC at $18,000 each
2022/05/11 - Amber bought 3 ETH at $1,700 each
2022/06/02 - Amber swapped 1 BTC for 10 ETH tokens for an average price of $2,100
2022/07/17 - Amber sold 10 ETH tokens at $2,200 each
Note that all transactions are taken to be CGT transactions for this example’s sake.
1st Disposal- 1 BTC swapped for 10 ETH
The cost basis of 1 BTC is $18,000 as seen on 2022/04/23
The disposal amount is equal to the cost price of 10 ETH tokens which comes out to be $21,000
Capital Gain/Loss = Disposal Amount - Cost Basis = $21,000 - $18,000 = $3,000
2nd Disposal- 10 ETH tokens sold for $2,200 each
Now, there are two different types of ETH tokens in this case.
Type-1 - Purchased for $1,700 on 2022/05/11
Type-2 - Acquired for $2,100 in a swap on 2022/06/02
The disposal amount is the same for all the tokens i.e. $2,200
Capital Gain for Type 1 ETH tokens = $2,200 - $1,700 = $500
So for 3 ETH tokens, the total gain comes out to be $1,500
Capital Gain for Type 2 ETH tokens = $2,200 - $2,100 = $100
For 7 ETH tokens, the total gain comes out to be $700
Total gain for 10 ETH tokens = $1,500 + $700 = $2,200
Total Gain/Loss = $3,000 + $2,200 = $5,200
This is the final amount you’ll pay CGT on.
Don’t worry if a market correction has left you with a pile of losses, you won’t be taxed on any of it. But instead of just letting it all go to waste, you can use them to reduce your tax bill by offsetting them against your capital gains. Remember that you can only offset 50% of your losses against your gains in a tax year similar to the capital gain taxation rule. If you still have leftover losses after that, you can carry them forward into the subsequent tax year as future losses and write them off against future gains.
Even if you’ve made no capital gains in a tax year, you can report all your capital losses to the CRA and carry them forward as a contingency write-off fund for any future gains you make.
Note that Canada has a Superficial Loss Rule to prevent investors from generating fictitious losses, which states that an individual can’t claim a capital loss if they buy the same crypto 30 days before or after a disposal.
The CRA is yet to release guidelines on lost and stolen crypto assets and whether you can use them as a tax-deductible. However, the CRA does allow Canadian residents to deduct capital losses due to the theft of other capital assets and since crypto assets are considered by the tax authorities to be a type of capital asset, you might be able to claim a tax deduction on your lost or stolen crypto assets in Canada.
The CRA offers the following tax breaks to Canadian residents:
The CRA offers a tax-free allowance of $14,398 to every resident which means that the first $14,398 you make will be tax-free in Canada.
The spousal tax credit allows you to transfer your unused tax credit to your married or legal partner. If your income is $8,000 while your partner makes $20,000, you can transfer the remaining $6,398 ($14,398 - $8,000) of your tax credit to your partner.
As mentioned above, only 50% of your capital gains are taxable in Canada, therefore you don’t need to worry about your entire earning being taxed.
4. Use a Tax Free Savings Account or a Registered Retirement Savings Plan
Contributions to the TFSA account are capped at $6,500 while the RRSA contributions are 18% of one’s previous year’s income or $30,780 (whichever’s lower). Contributions to both are tax deductible.
In Canada, the adjusted cost basis method is employed for calculating the cost basis of capital assets, including cryptocurrency. This method enables you to adjust your cost basis to accurately reflect the actual amount of funds invested in a specific asset. By utilizing this approach, you can account for all the expenses associated with acquiring the asset, such as exchange fees and gas fees related to transaction activities on a network.
The adjusted cost basis method can be better understood through an example:
Suppose you acquired a cryptocurrency for $100, but you incurred a $5 fee while using the exchange for the purchase. In this scenario, your adjusted cost basis would be $105, as it includes the additional fee. Subsequently, if you sell the cryptocurrency for $150 at a later time, but had to pay another $5 fee to use the exchange, your adjusted cost basis for the sale would be $110.
In situations where you possess multiple identical assets, the CRA recommends employing the average cost basis method. This method allows you to determine the total cost of a group of identical assets that you own.
For example, let's say you own 10 BTC tokens acquired at different times and prices. To calculate your average cost basis, you would add up the total amount you paid for all 10 BTC tokens, and then divide that sum by the number of tokens you own.
Now that we’ve covered how capital gains are taxed in Canada, it’s now time to understand how crypto income is viewed by the CRA.
Suppose you appear to be making regular or recurring income from crypto assets in a business-like fashion. In that case, your transactions will be treated as discrete business operations and an income tax will be levied on them. Here are some transactions that may attract an income tax in Canada:
Many play-to-earn games and similar interact-to-earn platforms have emerged lately. The profits you earn from these platforms may qualify as business income and may be liable for Income Tax. Listed below are some examples:
The income tax rates in Canada are the same as the Provincial income tax rates and the federal income tax rates as mentioned in the “Capital Gains Tax Rate” section above. You can revisit the section or look at a comprehensive list of income tax rates in Canada here.
Unlike calculating capital gains or losses, calculating your crypto income is simple. All you need to do is to find the fair market value of the assets at the time you receive them and do it for all the assets you’ve received over a tax year and then add them all up. The number you get is your taxable income base and you can apply the federal and provincial income tax rates to them to calculate how much you owe as income tax to the CRA.
Although crypto transactions are taxable in Canada, some transactions are tax-free:
The following transactions are considered taxable in Canada:
Your mining activities are taxed based on your intentions and the nature of your returns. If you’re seen as an individual doing it as a hobby, you will attract capital gains tax. While if you appear to be mining as a business, the gains will be taxed as income.
If you’re mining as a hobby, you will not attract income tax. The tokens received as mining rewards will inherit the cost basis equal to $0. Which makes sure that all your gains are taxed once you dispose of these tokens by selling, swapping, or gifting these assets.
Mining as a business is different from mining as an individual. Any tokens that you own are considered an inventory and you have to value these assets using any one of the following methods:
When determining the value of your inventory, you have the option to use either the cost or fair market value. If you go with the former, you can choose the lower value for each particular cryptocurrency you own, which is a great way to plan for taxes. 'Cost' refers to the price paid for acquiring the property, as well as all relevant expenses associated with its purchase. Maintaining consistency in the method used to value your property year after year is crucial.
Note that the CRA has made new amendments to the Excise Tax Act in section 188.2 which define “cryptoassets” for the specific purpose of applying goods and services / harmonized sales tax (GST/HST) to cryptoasset mining activities.
Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
If your business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.
You can add and validate new transactions to a blockchain in two ways. One is through staking (for proof of stake networks) and the other is through mining (for proof of work networks).
In this context, staking fulfils a role akin to mining. It involves the selection of a network participant to include the most recent set of transactions in the blockchain and receive cryptocurrency as compensation. Validators are chosen by the network based on the magnitude of their stake and the duration of their holding. Consequently, participants with higher investments are duly rewarded.
Staking rewards are treated the same way as mining rewards for tax purposes. The tokens you receive as a result of mining inherit the cost base equal to the FMV at the time of receipt and are taxed as income.
If you later decide to dispose of these tokens by selling, swapping, or gifting them, these tokens attract CGT.
The taxation of margin trades, futures, and CFDs depends on whether you’re seen as an individual investor or day trader which depends on the scale of transactions.
If the CRA considers you to be a private investor, any gains from margin trades, derivatives, and other CFDs will be subject to Capital Gains Tax. You won't owe any tax when you initiate a position. Instead, the tax is applicable only when you settle your position, and any gains resulting from it will be subjected to Capital Gains Tax.
On the other hand, if the CRA perceives you as a day trader who trades frequently at the same level of scale, you'll be liable to pay Income Tax on all the profits you earn from your trades. As discussed earlier you won't owe any tax on initiating a position while margin trading, dealing in derivatives, or other CFDs. Instead, you'll be taxed only when you close your position and realize any profits.
Gifting crypto in Canada constitutes a taxable event as it is seen as the disposal of crypto assets. You’re liable to pay CGT when you gift crypto to others if the value of the asset has increased since you acquired the asset.
Note that you only pay CGT on 50% of your gains.
Crypto donations to a registered charity are also considered as a disposition of assets and entail a gains tax liability if the value of donated assets has increased since acquisition.
When you donate cryptocurrency to a registered charity, it is classified as a Gift of Kind donation. As such, it falls under the deemed fair market value rule. This requires you to inform the charity about the acquisition date of your crypto asset. If the asset was received and donated within three years of the acquisition date, the charity may issue a tax receipt based on the value at the time of acquisition.
It’s still not clear whether income from ICOs is viewed as business income or just regular income by the CRA. We will be adding more details regarding the taxation of tokens received from ICOs once the guidelines regarding the same hit our radar.
DAOs are member-owned communities with a shared vision. All the decisions in a DAO are made by the members in the absence of central leadership. They are new-age institutions that aim to democratise decision-making and allow people to have a say in decisions that directly affect them. DAOs are often called the soul of Web3 and allow members to earn rewards in multiple ways. DAO contributors are rewarded for their contributions to the organization, similar to how centralized organizations pay salaries to their employees. They also pay out bounties for one-time projects and redistribute any profits generated through operations.
The taxation of DAOs lacks specific guidance from the CRA. However, since DAOs are not registered entities and lack centralized control, they are similar to flow-through entities. In this interpretation, any income distributed to DAO members would likely be subject to Income Tax, and capital gains taxes would apply to the sale of appreciated DAO tokens acquired over time.
As the CRA hasn't made a conclusive decision on the tax treatment of NFTs, it's reasonable to infer that they're regarded as crypto assets based on existing guidance. Consequently, they will be regarded as capital property and will be subject to the same tax obligations as crypto assets.
The CRA is yet to release guidelines on the taxation of DeFi transactions. However, that doesn’t mean that you won’t have to pay any taxes on DeFi transactions, the following can be inferred from the existing guidelines about DeFi transactions and their taxation in Canada.
Whenever you receive crypto as a form of compensation, such as through business activities, you'll be accountable for Income Tax. Conversely, when you sell or dispose of your crypto assets, you'll most likely be liable for Capital Gains Tax. It's prudent to consult an experienced tax consultant regarding your unique DeFi investment portfolio. That being the case, here are some DeFi transactions and how they will be taxed according to what we could find and extrapolate:
Although the Canada Revenue Agency (CRA) hasn't provided explicit instructions on the tax implications of airdrops and forks in Canada, we can deduce their tax treatment based on the CRA's guidelines for categorizing business income. It's improbable that airdrops and forks will be subjected to taxation upon receipt. You'll be obligated to pay Capital Gains Tax when you dispose of the coins or tokens you received from the airdrop or hard fork.
In Canada, the tax year aligns with the calendar year, commencing on January 1st and concluding on December 31st. Canadian citizens should be aware that the reporting of cryptocurrency-related income, capital gains, and losses must be conveyed to the CRA by April 30th, 2023.
In the event that the deadline falls on a weekend, taxpayers are granted an extension until May 1st, 2023, to fulfil this obligation. It is highly recommended to avoid delaying this matter, as individuals have the freedom to commence the submission of their tax returns by the end of February.
Please note that your tax payment will be considered timely only if it is received or processed by the CRA on or before May 1st each year.
There are several ways you can choose to file your taxes in Canada. We have listed some of them below:
You can use certified tax software like Kryptos to file your taxes in Canada. It is quite convenient and creates a legally-compliant tax report in a matter of minutes by auto-fetching all your transactions and incorporating any deductions that are possible. With certified tax software, you can complete your tax returns within 2 weeks.
A tax accountant is someone well-versed in the tax infrastructure and can help you save a lot of time and money by utilizing existing loopholes in the system. The only demerit of using this option is the high accountant consulting fee which may not make sense to you if you have a nominal income.
Tax clinics have volunteers who can file your taxes for free. All you need to do is find one and hand over your transaction records. Note that this might not be the ideal option for someone with a complex set of transactions and high income.
A Discounter is a tax preparer who provides an upfront discounted tax refund by computing your refund amount, even before submitting your tax return. Filing your tax return through a tax preparer is the fastest way to file your taxes because the discounter pays you a discounted return right away before filing your taxes.
The CRA has issued clear guidelines regarding the record-keeping of transactions for tax purposes. Here’s a list of documents you should maintain according to the CRA:
Now that you’re aware of how your crypto transactions are taxed and what forms you need to fill out to complete your tax report, here’s a step-wise breakdown of how Kryptos can make this task easier for you:
If you still have any doubts regarding the integrations or generating your tax reports, you refer to our video guide here.
Although you can’t avoid paying crypto taxes entirely there are some ways you can bring down your tax liabilities legally:
Canadian residents can use a Tax-Free Savings Account (TFSA) for tax-free profits. Instead of directly buying cryptocurrency, they can invest in Bitcoin ETFs on the Toronto Stock Exchange, such as Purpose Bitcoin ETF (BTCC), Evolve Bitcoin ETF (EBIT), and CI Galaxy Bitcoin ETF (BTCX). These ETFs track Bitcoin's price and offer a convenient way to invest without the complexities of self-custody and with potential management fees.
Investing in a Retirement Savings Plan is the best way to ensure a secure future and lower your tax bill at the same time. Contributions to RSP are tax deductible and can be used to lower your tax bill. You can even contribute to your spouse’s RSP and claim a tax deduction on that too.
Use your losses as an offset against your gains to lower your tax bill. You can close positions with potential losses and use them as an offset against any gains you’ve made within the tax year.
All content on Kryptos serves general informational purposes only. It's not intended to replace any professional advice from licensed accountants, attorneys, or certified financial and tax professionals. The information is completed to the best of our knowledge and we at Kryptos do not claim either correctness or accuracy of the same. Before taking any tax position / stance, you should always consider seeking independent legal, financial, taxation or other advice from the professionals. Kryptos is not liable for any loss caused from the use of, or by placing reliance on, the information on this website. Kryptos disclaims any responsibility for the accuracy or adequacy of any positions taken by you in your tax returns. Thank you for being part of our community, and we're excited to continue guiding you on your crypto journey!