Are you a crypto investor? Whether you are day trading crypto or a buy-and-hold investor, it’s important to understand when you trigger a taxable event in Canada. After all, you don’t want to be stuck with a large tax bill at year-end. In this article, we’ll cover how crypto is taxed in Canada and eight legal strategies you can use to pay less crypto tax.
How is Crypto Taxed in Canada?
The Canada Revenue Agency (CRA) generally treats cryptocurrency as a commodity for tax purposes, subject to either capital gains tax or business income tax depending on the nature of the transactions. The CRA taxes realized gains from crypto dispositions, which include sales, trades, and using crypto to purchase goods or services. Capital losses can be used to offset capital gains, with net capital losses being carried forward indefinitely or back up to three years. Your gain is determined by subtracting your basis (the purchase price) from the sale price. For example, if you bought CAD $20,000 of crypto and then sold it for CAD $25,000, your net gain would be CAD $5,000.
However, the CRA further differentiates crypto transactions between business and personal. Transactions deemed to be part of carrying on a business are fully taxable as business income. The CRA considers various factors to determine if crypto activities constitute a business, including frequency of transactions, intention to make a profit, and sophistication of the operation. On the contrary, non-business transactions result in 50% of the gain being taxed as capital gains. These transactions will be reported on your annual income tax return in the year of the disposition.
It’s important to note that crypto transactions only become reportable once you sell, trade, or dispose of the crypto. Buying and holding crypto does not create a taxable transaction. Crypto earned, such as in exchange for services, is taxed similar to regular earnings with ordinary income tax applied.
8 Strategies to Pay Less Crypto Tax in Canada
Before we get into strategies to pay less crypto tax in Canada, we need to differentiate between tax avoidance and tax evasion. Tax avoidance strategies are legal methods to reduce your tax liability. On the other hand, tax evasion involves intentional misreporting, resulting in an underpaid tax liability.
The following strategies are designed to be tax avoidance strategies. Remember, there’s no legal way to cash out crypto without paying taxes in Canada, which is why it’s best to consult with a tax accountant to find ways to legally lower your tax bill.
Offset Gains with Losses
Not every crypto sale will generate taxable income. In fact, you might generate a loss if you sell crypto for less than you bought it for. You can use these losses to offset other gains. For example, if you have a CAD $1,000 loss from one transaction and another transaction that generated a gain of CAD $2,500, your net taxable gain would be CAD $1,500.
However, the CRA only allows you to eliminate any gains, meaning you can’t lower your taxable income with excess losses. Capital losses can be carried back up to three years to offset capital gains in those years, potentially resulting in a tax refund.
Harvest Tax Losses
Crypto transactions are only taxed upon disposition. If you have a large tax bill with lots of crypto gains, you can use a strategy called tax loss harvesting. In this strategy, you intentionally sell crypto transactions at a loss to reduce your taxable gains. If you do re-purchase the assets, you will need to wait 30 days to avoid the superficial loss rule that disallows your loss.
Hold Investments in a Registered Retirement Savings Plan
One overlooked strategy is to hold your crypto investments in a Registered Retirement Savings Plan (RRSP). Contributing to an RRSP allows you to claim a deduction on your income tax return, reducing your taxable income for the year. However, it’s important to note that direct cryptocurrency holdings are not currently qualified investments for RRSPs. Instead, only certain crypto-based ETFs and trusts are eligible. By investing in these eligible vehicles, you can still gain exposure to cryptocurrency within your RRSP.
When you eventually withdraw funds from your RRSP, they will be taxed at your marginal tax rate, which is often lower during retirement, allowing for potential tax savings.
Leverage a Bitcoin ETF
An Exchange Traded Fund (ETF) is an investment option that tracks price movements in Bitcoin. For example, Canadian-listed crypto ETFs such as the Purpose Bitcoin ETF (BTCC) or the CI Galaxy Bitcoin ETF (BTCX) allow investors to gain exposure to Bitcoin’s price fluctuations without directly holding the cryptocurrency. However, you don’t actually own Bitcoin. This makes it a great strategy for investors who want to invest in crypto without actually holding physical coins. Purchasing an ETF makes your recordkeeping simpler and gives you more flexibility if you want to harvest losses.
Donate Crypto to Charity
Donating crypto can also result in a lower tax bill. The CRA considers crypto a commodity, meaning donations don’t follow the same rules as cash. When you donate crypto, you will need to pay taxes on any gains; however, you can also take a deduction for the donation. The donation deduction amount is based on the receipt issued by a charity.
Let’s say you donate cryptocurrency to a registered charity in Canada. You originally purchased the crypto for CAD $500, and at the time of the donation, the fair market value (FMV) is CAD $2,000. In Canada, when donating appreciated property like cryptocurrency, you can choose the deemed disposition price—either your adjusted cost base (ACB) (the original purchase price) or the fair market value.
For example, if you select the FMV of CAD $2,000 as the deemed disposition price, you will receive a charitable donation receipt for CAD $2,000, which can be used for a tax deduction. However, you will need to report and pay taxes on the capital gain of CAD $1,500 (FMV of CAD $2,000 minus ACB of CAD $500).
Alternatively, if you choose the ACB of CAD $500 as the deemed disposition price, you will not have any taxable capital gain, but your charitable donation receipt will also be limited to CAD $500. This flexibility allows you to optimize the tax impact based on your individual situation.
Understanding Crypto Income Classification for Tax Optimization
When dealing with cryptocurrency gains in Canada, it's crucial to understand how your income may be classified by the Canada Revenue Agency (CRA), as this can significantly impact your tax liability. The CRA distinguishes between business income, where 100% of gains are taxable, and capital gains, where only 50% of profits are included in taxable income. This classification is determined by various factors, including transaction frequency, holding duration, intent, and time spent on crypto activities. Being aware of these factors and how they apply to your situation can help you better estimate your potential tax liability, maintain proper records, and ensure compliance with tax regulations. While it may be advantageous to have gains classified as capital gains, it's important to remember that the CRA makes the final determination based on your specific circumstances. Consulting with a cryptocurrency tax specialist can provide valuable insights and help you develop strategies to optimize your tax position within legal boundaries.
Be Cautious About Selling
A taxable transaction is only created once you sell your investment. If you don’t need to sell your crypto, consider holding onto the investment. Also, be cautious around the end of the year. It might be better to wait until January 1 of the next year to sell your investments.
However, it’s important to note that tax rates do not change on January 1st. The advantage lies in deferring the tax liability to a future tax year, which could be beneficial depending on your financial situation. Careful planning around the timing of your sales can help optimize your tax outcome.
Organize Your Data
Another strategy to lower your crypto taxes is to organize your data. Crypto is deregulated, meaning companies don’t need to conform to the same reporting requirements as other assets. As a result, you need to keep track of all data pertaining to your investment, such as your cost basis, the date you purchased the crypto, the sale price, and the date you sold your investment. This includes records from exchanges, wallet addresses, exchange accounts, and transaction hashes. Detailed records of these items help you report accurate crypto gains and losses on your tax return. The CRA requires records to be kept for at least 6 years from the end of the last tax year they relate to.
Summary
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Crypto tax situations can be complex, and individual circumstances vary. We recommend consulting with a qualified tax professional for personalized advice tailored to your specific needs.
