The concept of cryptocurrency is, in and of itself, fairly complex. As digital assets that are used for trading but not, in and of themselves, considered legal tender, there are unique tax implications to the use of cryptocurrency.
In this article, we’ll explore these implications from the perspective of an individual buying and selling cryptocurrency as a hobby or investment and not as a business. The tax implications of buying and selling cryptocurrency for businesses are quite different—if you’re interested, let us know, and we’ll write about cryptocurrency and businesses in another article.
There are a number of different tax rules and tax laws that govern the tax obligations you may incur from selling or trading cryptocurrency. Selling cryptocurrency may affect your income taxes—if you see a profit, you may have to pay tax on that profit. Let’s explore how cryptocurrency affects taxes in Canada:
Capital Gains Taxes and Cryptocurrency
Cryptocurrency is generally treated like a commodity for income tax purposes. This means that profits realized by selling cryptocurrencies are taxed as capital gains. The opposite is also true—losses realized by selling cryptocurrencies are considered capital losses.
In Canada, 50% of capital gains (or capital losses) are taxed (or applied against your taxable capital gains). To help demonstrate this, let’s use an example:
Taylor bought $5000 worth of Bitcoin in 2023. The same year, she sold that Bitcoin for $7500. Taylor realized a capital gain of $2500 ($7500 – $5000). 50% of that capital gain is taxable, so Taylor must report capital gains of $1250 on her income tax.
Alternatively, one could sell cryptocurrency at a loss and record capital losses. Here’s an example:
Taylor bought $5000 worth of Ethereum in 2023. The same year, she sold that Ethereum for $2500. Taylor realized a capital loss of $2500 ($2500 – $5000). 50% of that capital loss can be used against the capital gains tax she owes in 2023—$1250 total.
In our example, Taylor would owe capital gains taxes on $1250 profit from her Bitcoin sales. She would, however, be able to use the $1250 of capital losses to offset her capital gains taxes—in the end, she wouldn’t owe any capital gains taxes.
Note that capital losses cannot be used to offset regular income tax—only capital gains taxes.
Disposing of Cryptocurrency – Where Capital Gains Tax Gets Complex
The scenarios we outlined above were incredibly simple—someone bought a cryptocurrency using Canadian Dollars, then sold those same assets for Canadian Dollars.
Most cryptocurrency transactions are far more complex. People will purchase one type of cryptocurrency, trade it for another type, bridge that cryptocurrency from one blockchain platform to another (like from Ethereum to Polygon), buy NFTs, sell those NFTs for Bitcoin, then use that Bitcoin to buy a patio set.
Depending on the nature of these transactions, all of them may be subject to capital gains tax.
The Canada Revenue Agency (the tax authorities here in Canada) does not consider cryptocurrency to be legal tender. As such, any trade of cryptocurrency for cryptocurrency is considered bartering. This means that, for every trade you make, you need to evaluate the fair market value (FMV) of each cryptocurrency being traded.
Establishing FMV can be done in many ways, including using the exchange rate from the broker you’re using or using an average of midday values across a number of cryptocurrency exchanges.
Consistency is key here—if you use one method to determine FMV, you need to use that same method for all of your cryptocurrency-to-cryptocurrency transactions.
As you can see, cryptocurrency taxation is quite complex, and even identifying taxable events can be time-consuming. You must record capital gains and losses every time you trade cryptocurrency. Even using cryptocurrency to buy a patio set is considered bartering, making cryptocurrency taxation and establishing FMV even more complex.
Selling cryptocurrency, trading cryptocurrency, converting cryptocurrency to cash, and using cryptocurrency to buy goods or services are all considered dispositions. All dispositions are considered taxable events for which you must record capital gains or losses.
Simply holding cryptocurrency, on the other hand, is not a taxable event, nor is purchasing cryptocurrency using legal tender.
This article is truly just touching the tip of the iceberg when it comes to crypto taxation—we highly recommend that you speak with a tax professional if you’re trading cryptocurrency. Our tax accountants in Winnipeg can help—give us a call today!