In our article on the general and worldwide taxation of Bitcoin, we examined a variety of relevant subjects. Before diving into how Bitcoin is taxed in Canada, you may wish to read that previous article for some important background information. Among other subjects, it covers:
- The crypto taxation and regulation agreements reached at recent G20 summit in Argentina. While the repercussions have yet to reach Canada, increasing levels of international cooperation and coordination around these issues are likely to impact Canadian Bitcoiners in time.
- The various apps and advisors available to make it easier to keep proper records of your Bitcoin transactions, as well as calculate your tax bill correctly. For example; SimpleTax is a tax app designed specifically for the tax needs of Canadians. It includes support for cryptocurrency and is NetFile (Québec) certified.
- Our previous article also tackles one of the most controversial subjects in cryptocurrency; whether or not to report one’s profits to the taxman. If the tax reporting situation in the USAis any indication, very few people in the world are reporting their crypto gains. However, this situation is likely to change in future, as tax agencies get wise to crypto and start involving regulated crypto exchanges in their tax enforcement efforts.
How Bitcoin and Crypto are Classified in Canada
The Government of Canada’s official website contains a section on digital and crypto-currencies. There it is stated that crypto is not considered as legal tender. This is not to say that Bitcoin is illegal – indeed Bitcoin and other forms of “virtual money” are perfectly legal to use within Canada. However, such currencies are not recognized by law as an undeniable means of payment. Only Canadian bank notes and coins are considered legal tender within Canada.
Instead, the Canadian government considers Bitcoin and other cryptocurrencies to be akin to commodities. This classification of Bitcoin as a commodity largely defines how all cryptos are taxed in Canada, although some special considerations may be applied in future.
The Canada Revenue Agency’s Position on Bitcoin
The Canada Revenue Agency (CRA) laid out its Bitcoin taxation policy with a fact sheet published in 2015. As cryptos are considered as commodities, they fall under the existing tax codes which govern the trading of commodities. In short, existing tax laws are applied to cryptocurrencies, even if you trade them via exchanges located overseas.
More specifically, cryptocurrency transactions between different parties are subject to the rules governing barter transactions under the Income Tax Act. When purchasing goods or services using crypto, then Goods and Services Tax (GST) / Harmonized Sales Tax (HST) must also be applied to the final price by the merchant and paid by the customer.
Further, the CRA requires that users of Bitcoin or crypto record and report all their transactions. The CRA is at pains to point out that not reporting crypto income is illegal, whether that income is from within Canada or abroad. The CRA encourages the voluntary disclosure of any such income which may have gone unreported. Such voluntary disclosure will likely incur reduced penalties for outstanding amounts.
How Bitcoin is Taxed in Canada
At this stage, Canada’s taxation of Bitcoin is relatively simple when compared to some other nations. Unfortunately, the resultant lack of detail leads to a lot of uncertainty on how special cases, such as profits derived from mining or forkcoins, are to be handled. When any such doubt exists, it’s always best to consult with a tax professional and / or communicate with the CRA directly.
It’s worth noting that the purchase of Bitcoin is not taxed; only its usage is taxed. For individuals, only two taxes are applied to the usage Bitcoin and other cryptos by the CRA; these being personal Income Tax and Sales Tax (in the form of GST / HST).
Here’s some further detail on how and when these taxes are applied:
Income tax is applied to the following Bitcoin or altcoin transactions, which are considered taxable events:
- Receiving bitcoins in exchange for goods or service (eg. receiving BTC for mowing a lawn),
- Exchanging crypto for another crypto (eg. exchanging BTC for ETH), or
- Exchanging crypto for fiat (eg. selling BTC which you previously bought or mined for CAD).
In the first case, in which coins are received in exchange for goods sold or services rendered, income tax is applied on the transaction in the same way as would be applied to barter. As Bitcoin is not considered money per se, such transactions are seen as the exchange of a commodity for goods or services. The value of the crypto received should match the fiat value which would be charged for those same goods or services on the day of sale, and reported accordingly. GST / HST may also apply to such transactions.
In the event that you exchange bitcoin for fiat or an altcoin, as in the latter two cases, you’ll be taxed according to the profit or loss you realized. In other words, the difference of value from the time you first acquired the BTC to when you exchanged. It’s possible for this value to be negative if the price of BTC has fallen since you acquired it. In this case, you can report a loss rather than a gain.
Income Tax is Halved on Capital Gains
In the case of either a gain or a loss realized during the course of investment activity, only half the difference is value is either taxable or deductible, respectively. This rule applies only to capital rather than income however, meaning that exchange trading activity will likely not benefit from this deduction.
Unfortunately, the differentiation between capital and income can be somewhat hard to assess. The CRA will decide into which category a transactions falls based on how many such transactions are made, how long the asset was held, and various other relevant factors.
As an example of how capital gains are handled, imagine that you bought 1 BTC at a price of $1,000 in early 2017. You then sold the 1 BTC at a price of $10,000 in early 2018. Your profit is the difference between the sale price and purchase price, in this case: $9,000. Under the Capital Gain case, you would then be taxed on half that profit, so: $4,500. You would thus include this $4,500 as income in your tax return.
If instead you bought 1 BTC in early 2018 at a price of $10,000 and sold it in late 2018 at a price of $3,000, you made a loss of $7,000 rather than a profit. Again, half of this amount could be reported on your tax return as a capital loss, which could then be deductible from your total income tax bill.
General Sales Tax / Harmonized Sales Tax
GST / HST is levied in the following instance:
- Anyone running a business which accepts crypto in exchange for goods or services, must add GST / HST to the cost of their goods or services. This tax must then be paid to the CRA, in exactly the same manner as when accepting Canadian Dollars for goods or services.
The CRA will Likely Enforce Stricter Taxes in Future
Like many other tax agencies worldwide, the CRA is studying crypto, doubtless with a view to taking a bigger tax slice out of the Canadian crypto economy. As Bitcoin becomes ever more integrated with and important to the regular economy, it’s almost certain that new tax laws will be passed to close the many loopholes which still exist in Canadian tax law.
However, this is not to say that there aren’t – or won’t be – many legitimate ways to significantly decrease your crypto tax bill. Gift allowances, life insurance policies, setting up trusts and corporations – all these and more options are worth investigation. Tailored advice from a good accountant or tax lawyer might prove invaluable in this regard.
This article is intended for information purposes only, and should not be taken as legal or tax advice. The author is neither a tax professional nor a Canadian resident. We therefore recommend that you conduct your own research into the matter; the CRA site contains a great deal of useful information on this subject and should be considered as authoritative. Kindly consult with a tax specialist, such as an accountant or tax lawyer, should any difficulties or further questions arise.