Tax on bitcoin in Canada- All you need to know
In this article we will be discussing all you need to know about tax on bitcoin in Canada….
Bitcoin and other cryptocurrencies are entirely new avenues of earning income for Canadians and people worldwide. In the past few years, cryptos have proved to be a great source of generating revenue, which is evident from the sheer number of people getting involved with bitcoin Canada.
In fact, cryptocurrencies can open up several different ways of earning an income. It can be earned through trading, mining, buying, holding, lending, getting paid for services rendered, receiving gifts, acquiring airdrops and much more. As with all other income, you are obligated to show income from cryptos and pay taxes on them.
Taxation of Bitcoin In Canada
In Canada, the Canadian Revenue Agency (CRA) treats cryptocurrencies as commodities. Therefore, if you earn bitcoin profits, they will be classified as either business income or as capital gains. The same goes, if you incur a loss as well.
It is important to note that, generally, if you possess or just hold crypto, it’s not taxable. But once you sell it, transfer it or give it away, tax laws can apply.
When Do Taxes Apply?
When cryptocurrencies are involved, taxes apply when the following happens:
– If you sell bitcoin and other cryptocurrencies.
– When you gift others cryptocurrencies.
– When you trade or exchange cryptocurrency, including crypto to crypto transactions.
– When you convert cryptocurrency to fiat currency, such as Canadian dollars
– When you use cryptocurrency to buy goods or services
How To Classify Income?
The first step to getting started with crypto taxation is to determine whether your activities are business activities or not. The Canadian Revenue Agency (CRA) has provided some useful guidelines to help users determine this. The following are from the CRA’s website:
The following are common signs that you may be carrying on a business:
– You carry on an activity for commercial reasons and in a commercially viable way.
– You undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory.
– You promote a product or service.
– You show that you intend to make a profit, even if you are unlikely to do so in the short term.
Some examples of cryptocurrency businesses are:
- cryptocurrency mining
- cryptocurrency trading
- cryptocurrency exchanges, including ATMs
As you can see, tax laws are quite clear about what may constitute a business and you can, therefore, classify your unique activities accordingly.
How Is Each Income Type Taxed?
The two types of income that are applicable to crypto are treated differently as far as taxation is concerned. 100% of the business income is taxable while only 50% of capital gains are taxable. Most Canadian’s crypto involvement falls under the second category but it is always best to figure out which one applies to your particular nature of work.
An example of business income from crypto could be – A day trader who frequently buys and sells different cryptos on a cryptocurrency exchange by taking into account the daily fluctuations.
An example of making capital gains could be – If you buy bitcoin Canada for speculative investment and later on go on to sell bitcoin for a profit, half of that profit will be taxable.
Taxation For Mining
The taxation of proceeds from mining depends on whether the mining is done as a personal activity (hobby) or business activity. Since there are so many factors and nuances involved in this, it is decided case by case.
Taxation For Airdrops
Airdrops are coins that a user basically acquires for free. As such, they didn’t pay any fiat for it, therefore their cost to acquire is taken as zero. Therefore, when they sell or dispose of those particular cryptos, the entire proceeds are considered as capital gains or business income. The proceeds are calculated at the time the user sells the airdropped cryptos.
Taxes On Crypto To Crypto Trading
These days, it is very common for traders to keep trading in cryptocurrencies without involving the Canadian dollars at all. For example, when a user buys bitcoin, then they buy eth (ethereum) with that bitcoin, and then buy dash with that eth and then go on to sell it for a stablecoin.
Thanks to stablecoins, a trader doesn’t need to involve fiat currency anymore. But this doesn’t mean that taxes are not owed when you do this. In fact, each transaction is looked at while calculating your tax liability. That’s why it’s so important to keep all the records.
Keeping All Crypto Records
Cryptocurrencies can result in a lot of transactions and it might be difficult to calculate your tax obligations. Therefore, it is of paramount importance that you keep a record of all your crypto-related activities, be it on a Canadian crypto exchange or anywhere else.
The CRA advises Canadians to keep the following records:
– the date of the transactions
– the receipts of purchase or transfer of cryptocurrency
– the value of the cryptocurrency in Canadian dollars at the time of the transaction
– the digital wallet records and cryptocurrency addresses
– a description of the transaction and the other party (even if it is just their cryptocurrency address)
– the exchange records
– accounting and legal costs
– the software costs related to managing your tax affairs.
Using Automated Software
As stated earlier, cryptocurrencies can result in a lot of transactions that can be almost impossible to keep track of manually owing to the fact that price points are often reflected in other cryptos and may not always involve CAD or USD. Some traders have been trading for many years and it might be impossible to make sense of past data.
Therefore, many cryptocurrency users have started using automated software that takes care of all the accounting and taxation related calculations automatically without the user having to do anything.
Reporting Crypto Taxes
The capital gains from your crypto transactions should be reported on Schedule 3 Form while your business income from cryptos should be reported on T2125 Statement of Business or Professional Activities.
For more information, you can visit CRA’s website.
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***Please ensure to declare any capital gains or reward income to your local taxation authorities to ensure you always remain compliant. Cryptocurrency purchased on illegitimate exchanges that do not run KYC may not be supported and have been listed/traded there without our permission. Investing in cryptocurrencies is a high-risk and volatile
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