Cryptocurrency is one of the most misunderstood financial instruments and the tax implications that comes with it can be just as confusing. My hope is to shed a little light on what you can expect for taxes on any crypto gains you may have had recently.
If you bought and sold any crypto in 2021 like bitcoin and ethereum, there is a good chance you will have some extra income to report on your 2021 tax return.
CRA does not view crypto as a currency, but rather a commodity. What this means is any income or gain on the sale or transfer of crypto will be treated as business income, or a capital gain on your personal tax return.
When Do You Need To Report Income From Crypto?
If you sold any crypto, transferred one crypto to another (e.g. bitcoin to ethereum), or used it to pay for any goods or services, you will need to declare any gain over the cost base as income or a capital gain.
The income will be treated as one of two ways:
Business Income, if you are day trading or keeping the crypto for a short time or receiving crypto as payment for goods and services. The entire gain will be treated as income and you may be able to deduct some business expenses against that income. Since each situation may be different, you should be speaking with a tax professional to determine what kinds of expenses you can deduct.
Capital Gain, if you are holding crypto for a long term investment. When you sell the crypto it will need to be recorded as a capital gain in which 50% will be shown on your personal return as income. You may be able to offset some of the fees relating the purchase and sale of the crypto against any of the gains.
Determining Cost Base
Now that you know what kind of income may need to report on your tax return, you will need to keep a record of the costs of the crypto you have purchased. CRA accepts an average cost base, which means if you are buying on a regular basis, you can take the average of the crypto holdings over the course of the purchases and use that as your cost base rather than trying to figure out a first-in and first-out method.
If you have bought using an online exchange such as Shakepay (which is a safe place to buy crypto in Canada at the time the article was written), you will be able to download a transaction summary that you can use to track the original cost price.
If you have not bought and sold a lot during the year, it can be as easy as taking the total dollar value you have purchased and divide by coins you have in your wallet to get the average price. This will be used as the cost base per coin, which you can use to determine if there are any gains or losses when selling the crypto by taking the total proceeds from the sale less the cost.
Here is a link to CRA’s website on cryptocurrency and taxes if you want a more in depth look.
This article does not imply any tax or investment advice since every situation is unique. This is intended to provide some basic information on how crypto is taxed in Canada.