How Is Crypto Taxed in Canada? What You Need to Know

Cryptocurrency has reshaped financial interactions, providing Canadians with new avenues for investment, trade, and transactions. Understanding the tax implications of these digital assets is important for anyone engaging with them in Canada. The Canada Revenue Agency (CRA) considers cryptocurrency a commodity or property, not legal tender. This classification means that various tax rules apply to cryptocurrency activities, much like other assets.

While merely holding cryptocurrency is not a taxable event, engaging in transactions often triggers tax obligations. These obligations arise when cryptocurrency is sold, exchanged, or used to acquire goods or services. Recognizing that cryptocurrency transactions are subject to taxation from the outset helps ensure compliance with Canadian tax regulations.

Characterizing Cryptocurrency for Tax Purposes

The Canada Revenue Agency (CRA) fundamentally treats cryptocurrency as a commodity or property, rather than as official currency. This distinction is important because it dictates how different cryptocurrency activities are taxed under Canadian law. For instance, when cryptocurrency is used to pay for goods or services, the CRA considers it a barter transaction.

The tax treatment of cryptocurrency depends on whether it is held as capital property or as inventory for a business. If an individual holds cryptocurrency primarily as an investment with the expectation of long-term appreciation, it is generally considered capital property. Conversely, if an individual engages in frequent and systematic cryptocurrency activities with a profit motive, such as day trading, the cryptocurrency may be considered inventory, and the gains would be treated as business income. This classification influences the tax rate applied to any gains or losses.

The CRA evaluates several factors to determine if cryptocurrency activity constitutes a business, including the volume of transactions, the time spent, the intention to profit, and the commerciality of the operation. Operating in a business-like manner, which might include having a business plan, suggests that profits from cryptocurrency transactions would be fully taxable as business income. However, if activities are viewed as a hobby or casual investment, gains are generally treated as capital gains, which have a different tax inclusion rate.

Tax Implications of Common Crypto Activities

Tax implications for cryptocurrency transactions vary significantly by activity. The CRA primarily categorizes gains or losses from cryptocurrency activities as capital gains or business income, though other income types can also apply.

Capital Gains and Losses

Many cryptocurrency transactions result in capital gains or losses, occurring when an individual disposes of capital property for more or less than its adjusted cost base (ACB). Dispositions include selling for fiat currency, trading one cryptocurrency for another, or using cryptocurrency to purchase goods or services. Each action is a taxable event, even if no fiat currency is directly involved.

To calculate a capital gain or loss, determine the cryptocurrency’s adjusted cost base (ACB). The ACB includes the original cost of acquiring the cryptocurrency plus any associated costs, such as trading fees. For multiple units acquired at different times, a weighted average cost method calculates the ACB for all units.

Once the ACB is established, the capital gain or loss is calculated as disposition proceeds (fair market value at disposition) minus the ACB and related expenses. In Canada, 50% of a capital gain is included in taxable income. For example, a $10,000 capital gain means $5,000 is added to the individual’s income for tax purposes.

Capital losses can offset current year capital gains, or be carried back three years or forward indefinitely. The superficial loss rule applies to cryptocurrency, preventing individuals from claiming a capital loss if they or an affiliated person repurchases the same or identical property within 30 days before or after the disposition. This rule prevents artificial loss claims.

Business Income

Cryptocurrency activities are classified as a business if conducted with a profit motive, organization, and commerciality, similar to other trading. This includes frequent and systematic buying and selling, which the CRA may consider day trading. Profits are fully taxable as business income, meaning 100% of net profit is added to the individual’s income.

Cryptocurrency mining, using computing power to validate transactions and earn new coins, can be a business activity. If done for profit regularly, income is treated as business income. Related expenses, like electricity costs and equipment depreciation, are deductible.

Staking, holding crypto to support a blockchain and earn rewards, generates business income if conducted in a business-like manner. Participation in Decentralized Finance (DeFi) activities, like providing liquidity or yield farming, can also generate business income if frequent and profit-driven.

Airdrops, distributions of new crypto tokens, can be business income if received as part of a commercial activity or ongoing business. If an airdrop is part of business operations, its fair market value at receipt is included in business income.

Employment Income

Cryptocurrency received as remuneration for employment services is taxable as employment income. This applies when an employer pays an employee or contractor in crypto. The fair market value of the crypto at receipt is included in the employee’s taxable income.

Employers typically report this income on a T4 slip, like traditional wages. The employee reports it on their personal tax return. Subsequent disposition of that crypto is subject to capital gains or losses rules, based on its fair market value at receipt as its cost base.

Other Income

Some crypto activities may result in “other income,” distinct from business or capital income. This includes certain airdrops or bounties received without expectation of future services or as a one-off, non-business event. The crypto’s fair market value at receipt is included as other income.

This category applies to miscellaneous income sources not fitting employment, business, or capital gain classifications. While less common for routine crypto transactions, the CRA uses it for unique situations.

Personal Use Exemption

The CRA offers a limited personal use exemption for capital gains on cryptocurrency. This applies when a small amount is used for personal purchases, similar to foreign currency for travel. If the capital gain is less than $200, it might be exempt. This exemption is narrow and generally does not apply to significant or frequent transactions; it’s for incidental personal use, not investment or trading.

Record Keeping for Cryptocurrency Transactions

Accurate and comprehensive record keeping is important for all cryptocurrency transactions to ensure tax compliance. The Canada Revenue Agency (CRA) requires individuals to maintain detailed records to support their reported income, gains, and losses. These records are necessary for calculating the adjusted cost base of cryptocurrency holdings and for substantiating claims in the event of a CRA review or audit.

Key information for each transaction includes the date and time, the type of cryptocurrency involved, and the quantity exchanged. Document the fair market value of the cryptocurrency in Canadian dollars at the time of the transaction. This valuation is key for determining the proceeds of disposition or the cost of acquisition.

Records should specify the transaction’s purpose (purchase, sale, trade, gift, or use for goods/services). Wallet addresses, trade confirmations, and transaction histories from exchanges are also necessary. These detailed records help reconstruct fund flow and support reported figures’ accuracy. Retain records for a minimum of six years from the end of the last tax year.

Reporting Cryptocurrency on Your Tax Return

After maintaining records, accurately report cryptocurrency activities on a Canadian tax return. Specific forms depend on how the CRA classifies the income or loss. Proper reporting ensures tax compliance.

Report capital gains and losses from cryptocurrency dispositions on Schedule 3, Capital Gains (or Losses). This schedule requires details of each disposition, including proceeds, adjusted cost base, and expenses. The net capital gain or loss is then calculated and transferred to the T1 General income tax and benefit return.

If cryptocurrency activities are a business, report income or loss on Form T2125, Statement of Business or Professional Activities. This form details gross revenue, business expenses, and net income or loss. The net business income or loss is then included in the individual’s total income on the T1 General return.

Cryptocurrency received as employment income is generally included on a T4 slip from the employer and reported as employment income on the T1 General return. Other income from crypto activities, like certain airdrops or bounties not classified as business income, is reported on line 13000 of the T1 General. Ensure all relevant forms are completed and submitted for accurate tax filing.