Around a decade ago, when Bitcoin and the overall cryptocurrency industry were still in their infancy and the sector started booming in popularity, governments and central banks were in panic mode. Countries worldwide began warning about fraud, illicit activities, and the enormous risks.
Today, the crypto ecosystem has changed, and these same institutions are now enthusiastic about crypto. Many central banks across the globe, from the Bank of Canada (BoC) to the Federal Reserve to the Bank of England (BoE), are considering adopting blockchain technology and releasing their own central bank digital currencies, also known as CBDCs.
But governments also like how Bitcoin, Ethereum, and the thousands of other cryptocurrencies are revenue generators for tax coffers.
Do you have to pay tax on cryptocurrency in Canada? Yes. Whether you are selling your crypto holdings or you receive payment in cryptocurrency, it will be taxed. So, let’s go into some of the details.
According to the Canadian Revenue Agency (CRA), cryptocurrency is treated similarly to a commodity for purposes relating to the Income Tax Act. As a result, any capital gains or losses that emanate from trading cryptocurrency will be taxed similarly to any other commodity.
Unfortunately, knowing how much tax you will need to pay on your crypto is not as clear. It will all depend on the type of transaction, the total amount, and the jurisdiction. Ultimately, there will be a federal and provincial tax rate.
But the CRA also notes that taxpayers will need to determine if cryptocurrency activity leads to capital or income. This is imperative because not everyone who engages in crypto transactions is doing so for business reasons.
In fact, consumers who utilize crypto to buy goods or services would treat their digital currencies as barter transactions. Once again, this would be for income tax reasons.
Since this can be challenging to manage throughout the year, the CRA has some recommendations for crypto users.
First, you will face taxation if you sell or gift cryptocurrency, use a digital token to pay for goods and services, trade crypto for another crypto, and convert crypto to fiat money (the Canadian dollar, for example).
Second, to determine if you are receiving business income or earning a capital gain, the CRA suggests looking at these signs to know if you are operating a business:
· Promote a product or service.
· Push activities for commercial purposes.
· Perform activities in a business-like fashion (preparing reports, writing a business plan, or purchasing capital assets or inventory.
· Present a behavior in which you are trying to generate a profit.
Of course, there are specific crypto businesses, too: ATMs, exchanges, mining, and trading.
In the end, each case would need to be assessed differently.
“In some cases, a single transaction can be considered a business, for example, when it is an adventure or concern in the nature of trade. Whether you are carrying on a business or not must be determined on a case-by-case basis,” the CRA noted.
Some crypto users might wonder if there is any way to shelter crypto holdings from taxation. The short answer is no. There are no registered tax-sheltered accounts, like tax-free savings accounts (TFSAs) or Registered Retirement Savings Plans (RRSP). However, if you want to tap into crypto and take advantage of these accounts, you could always consider crypto-related exchange-traded funds (ETFs).
One more thing: non-fungible tokens (NFTs) are also taxable.
Today, many still believe that cryptocurrency is only a tool for odious individuals and criminal organizations, whether to launder money or hide from taxes. However, crypto is not what it once was, at least on this front. It has matured immensely as a legitimate tool in the financial system. Even on the anonymity front, countless examples at home and abroad keep highlighting that it is not as anonymous as some had believed. This makes it easier to regulate, and contrary to popular opinion, the industry and consumers want regulation to offer everyone some certainty.
Despite millions of Canadians disliking the idea of having a portion of their earnings taken away by the government, it is a fact of life – and even your Dogecoin and Shiba Inu profits will need to be reported to the federal government. This might not elicit much enthusiasm, but it is the next layer for the world of blockchains, wallets, and digital currencies.