If you operate in the investment space, chances are you’ve heard of cryptocurrency. You might even own some crypto in your portfolio. With tax season approaching, it’s important you understand how the Canada Revenue Agency (CRA) taxes crypto investments.
Learning about how the CRA treats crypto, how to keep records of crypto transactions, and what you need to pay taxes will help round out your investment knowledge and leave you better informed if you decide to add crypto to your portfolio.
What is a Cryptocurrency?
Cryptocurrency is distinct from government-issued money (fiat currency) because it is designed to work digitally, backed by a technology called blockchain to record transactions and ownership. Blockchain technology is powerful because it acts as a public record which anybody can access to know who created the coin and when, and who owns it.
Unlike fiat currencies, which are issued by central banks, cryptocurrencies are “mined.” The mining process involves solving complex mathematical problems in order to unlock the cryptocurrency. Most cryptocurrencies have mining limit which mimics physical resources, but they don’t possess any inherent value like gold or natural resources.
Crypto can be used as a method of payment to buy goods and services from companies such as Microsoft, Starbucks, and Tesla. Some of the most well-known cryptocurrencies are:
- Bitcoin was created in 2009 & is the first cryptocurrency ever created
- Ether was created in 2015 & is second to Bitcoin in market capitalization
- Litecoin was launched in 2011 as a faster alternative to Bitcoin
- Dogecoin was created in 2013 & is the original “memecoin”
Bitcoin remains the most popular and highly-valued cryptocurrency, but other coins are quickly gaining popularity and legitimacy. As cryptocurrencies have increased in use and appeared in more financial plans, many governments are taxing and regulating them, including Canada.
How Do You Make an Income with Crypto?
Crypto’s value isn’t backed by any tangible asset or commodity. Its value is determined by entirely by what people are willing to pay for it, which makes the cryptocurrency market extremely volatile.
Like any other stock, bond, or fund, making money in crypto is all about knowing when to buy and when to sell. One week you might see your crypto portfolio’s value shoot up and the next it can plummet just as easily. These are the factors you must accept when you enter the crypto market—high risk equals high reward.
In order to buy and sell crypto, you can go through your investment portfolio manager or use a crypto exchange. A crypto exchange can easily convert your digital currency into fiat currency for every day use if you’re visiting a business that doesn’t accept crypto as a payment method.
How to Pay Taxes on Cryptocurrency in Canada
When regulating under the Income Tax Act, the CRA treats cryptocurrencies like any other commodity. Any increase in value is seen as either business income or capital gains in the eyes of the CRA. This means you’ll pay either Income Tax or Capital Gains Tax, depending on how the CRA views your trading activity.
The CRA will consider your cryptocurrency profits business income in the case that you’re mining, trading, or running a cryptocurrency exchange. Alternatively, you’ll pay Capital Gains Tax on cryptocurrency if you:
- Exchange cryptocurrency for fiat currency
- Trade cryptocurrency for other cryptocurrencies
- Spend cryptocurrency to buy goods and services
- Give cryptocurrency as a gift or donation
Keeping Accurate Records
The CRA requires you to keep a record of every transaction you make with cryptocurrency, including:
- Date of transaction
- Transfer receipts
- Value in Canadian dollars
- Cryptocurrency addresses
- Transaction description
- Accounting and legal costs
- Software costs
Accurate records are important because they help you report your gains and losses when tax season arrives. They are essential when calculating adjusted cost base.
Calculating Cryptocurrency Value
Tracking all your crypto transactions is important because you need to know the exact value of cryptocurrencies at the time of exchange in order to report income or loss during tax season. The CRA uses an adjusted cost base to determine asset value.
Adjusted cost base takes the book value of your crypto asset and adds all the costs related to the transaction, including accounting & legal and software costs. Capital gains tax is calculated by subtracting the adjusted cost base from the value of your crypto asset at the time of exchange.
The two items you’ll need in order to file your taxes and account for cryptocurrencies are:
An Evolving System
As cryptocurrencies increase in popularity, the CRA will develop new ways to regulate and tax your transactions. The CRA is already working with crypto exchanges to share customer information, and all money businesses must report transactions over $10,000 to the CRA. The best way to report your taxes on crypto is to do so honestly, so keeping accurate records is a must. If you’re a first time investor, or you need help keeping your financial records in order, a financial advisor can be a tremendous asset.
Qopia Investments is a trade name of Aligned Capital Partners Inc. (ACPI). ACPI is regulated by the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (www.cipf.ca). Qopia Investments is registered to advise in securities and mutual Funds to clients residing in Alberta, Ontario, Saskatchewan, and British Colombia. This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. The views expressed are those of the author and may not necessarily be those of ACPI. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
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Investment products are provided by ACPI and include, but are not limited to, mutual funds, stocks, and bonds. Non-securities related business includes, without limitation, fee-based financial planning services; estate and tax planning; tax return preparation services; advising in or selling any type of insurance product; any type of mortgage service. Accordingly, ACPI is not providing and does not supervise any of the above noted activities and you should not rely on ACPI for any review of any non-securities services provided by Qopia Financial.
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Senior Financial Planner of Qopia Financial / Investment Advisor of Aligned Capital Partners Inc.
Since the start of my career, my focus has been to consistently provide my clients with efficient and effective tax planning, while providing innovative investment advice as well as estate planning solutions.
Having worked in the financial service industry for over 40 years, my expertise includes offering tax strategies and preparation, life, disability and employee benefits alongside RRSP, pension and non-RRSP investment planning. Having been dual licensed since 1985 has allowed me to provide further alternative investment options for my clientele. Throughout my career, I have been a member of ADVOCIS, the premier national association for professional financial advisors. As an engaged member of the Calgary chapter, I am a strong advocate for continuing education in all areas of financial, investment and estate planning for all practitioners.