Crypto Taxes in Canada:
Adjusted Cost Base Explained

by William Carlsen · Updated Sep. 16, 2020

The Canadian Revenue Agency (CRA) has published a detailed tax guide for the taxation of cryptocurrencies and digital assets such as Bitcoin. The CRA treats cryptocurrencies similarly to commodities, and the implications are that individuals in Canada need to calculate and report their capital gains when they sell or trade a virtual currency.

In this article, we will explain everything you need to know about calculating cost basis in Canada for your crypto transactions according to Adjusted Cost Base including the Superficial Loss Rule. We will do this in detail by using a few practical examples and easily understandable terms.

Read this article to learn about:

What exactly is Adjusted Cost Base?

The Superficial Loss Rule and its consequences

Practical examples & calculations

How to report your crypto taxes in Canada

How to calculate Capital Gains

In almost every country today, individuals have to calculate and pay capital gains tax if dealing with cryptocurrencies and other assets. For Canadian individuals, the CRA has defined clearly which type of actions are considered a taxable event:

  • if you sell or gift cryptocurrency to someone else
  • trading of cryptocurrency (eg. BTC → ETH)
  • selling of cryptocurrency in exchange for fiat (eg. BTC → USD)
  • paying for goods or services with cryptocurrency

The consequence of this is that most people that have either sold, traded, or dealt with virtual currencies in one way or another are required to report this to the CRA.

Now, the question is how do you actually calculate this capital gains for your cryptocurrency transactions. The general formula for calculating capital gains is:

capital gains = selling price – purchase price

The selling price is the market value of the cryptocurrency sold on the date of the transaction, and the purchase price is the original purchase cost when you acquired the asset in the past. The purchase price should also include any reasonable acquisition costs like fees and commissions. This is often referred to as the cost basis.

As already mentioned, the cost basis needs to be determined according to rules for Average Cost Base in Canada. In the next section, we will explain how this works in more detail, together with what the Superficial Loss Rule is and how it affects the cost basis for cryptocurrencies.

Adjusted Cost Base w/ Superficial Loss Rule

To calculate the cost basis according to the Adjusted Cost Base, you need to keep track of the total purchase price and your total holdings of each asset at all times. To calculate the cost basis when you sell any cryptocurrency, simply multiply the total average cost with the number of coins sold or disposed of.

Now, this might not seem too complicated in and by itself, but the CRA has also put in place the Superficial Loss Rule which can make the calculations a lot more difficult to get done correctly by disallowing capital losses under certain conditions.

Let’s assume that you have bought and sold many different cryptocurrencies during the year. When the end of the year is approaching, you realize that you have significant net capital gains which means you need to also pay capital gains tax. At the same time, you also still own some assets that have fallen in price which are now at a loss.

Now, you might think that if you sell these assets today you will reduce your net capital gains and pay less tax as a result. Because you want to still hold those assets, you plan to buy back the same coins 1-2 days after selling them. This might sound like a very strategic plan on paper, but unfortunately, it’s not that easy in reality.

The Superficial Loss Rule has been put in place by the CRA to prevent exactly this. This rule comes into action when both of the following conditions are met:

  • You acquire identical cryptocurrency during the period beginning 30 days before and ending 30 days after the disposal
  • You either own or had a right to acquire the cryptocurrency at the end of that period

If both conditions are met, you are not allowed to claim the capital loss from selling a cryptocurrency.

To get a better understanding of how this Superficial Loss Rule actually works, we will look at a few practical examples in the next Sections.

Example 1

Our fictive character Mark has bought Bitcoin on two occasions in 2019 and then sold all his coins on the 5th of June, 2020. Later that year, he bought 1.2 BTC again. All his transactions can be seen in the below table:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC$1,800$20$1,820
2Buy2019-10-290.6 BTC$4,300$20$4,320
3Sell2020-06-050.8 BTC$5,700(?)(?)
4Buy2020-09-231.2 BTC$8,200$8,200

For Mark to calculate the capital gains he needs to first find the ACB of his Bitcoin holdings prior to the sale on the 5th of June.

Adjusted Cost Base:

1,820 + 4,320 = $6,140

ACB per coin:

$6,140 / 0.8 BTC = $7,675 per BTC

Since Mark sold all his coins, the cost basis is equal to his ACB ($6,140).

The resulting capital gains for Mark is therefore found as:

Capital gains:

$5,700 – $6,140 = ($440)

Mark has now realized a loss of $440 by selling his BTC at a lower price than what he originally paid. Note that the Superficial Loss Rule does not kick in because the first criteria above were not fulfilled: Mark did not purchase BTC during the period starting 30 days before and ending 30 days after the disposal on the 5th of June.

Example 2

In this next example, Mark bought the 1.2 BTC a few days after disposing of his holdings. This means that the Superficial Loss Rule has been triggered and Mark is therefore not allowed to claim the capital loss of $440 as found in Example 1.

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC$1,800$20$1,820
2Buy2019-10-290.6 BTC$4,300$20$4,320
3Sell2020-06-050.8 BTC$5,700(?)(?)
4Buy2020-06-071.2 BTC$7,000(?)

What Mark needs to do is add the capital loss ($440) to the ACB of the BTC bought on the 7th of June, 2020. The ACB for 1.2 BTC bought becomes:

Adjusted Cost Base:

7,000 + 440 = $7,440

ACB per coin:

$7,440 / 1.2 BTC = $6,200 per BTC

We can now summarize our findings in the below table:

Tx No.TypeDateAmountPriceFeesCost BasisCapital Gains
1Buy2019-08-140.2 BTC$1,800$20$1,820
2Buy2019-10-290.6 BTC$4,300$20$4,320
3Sell2020-06-050.8 BTC$5,700$6,140($440)
4Buy2020-06-071.2 BTC$7,000$7,440

Compared to Example 1, Mark was not allowed to claim the $440 loss because he bought the same asset (BTC) only two days later which triggered the Superficial Loss Rule.

Summary and Takeaway

We have in this article explained how capital gains and cost basis calculations for cryptocurrencies should be done in Canada according to guidance released by the CRA. We have also looked at the Superficial Loss Rule and under which conditions you are not allowed to claim a capital loss. Lastly, we looked at two practical examples where we worked out the cost basis and capital gains calculations for our fictive character Mark.

For more information about cryptocurrency taxation in Canada, we recommend that you read our free and in-depth tax guide that is updated regularly:

This guide covers not only how to work out the ACB, but also possible tax implications if you have received cryptocurrency from airdrops, staking rewards, hard forks, or participated in mining activities.

If you are looking for an easy and user-friendly solution to calculate your crypto taxes, we recommend that you check out Coinpanda. This tax solution has in a short time become very popular and has helped generate tax reports for more than 7500 cryptocurrency investors and traders so far.

You can easily import all transactions from exchanges like Coinbase and Binance automatically. The team is currently working on adding support for the Superficial Loss Rule so that you can file your next tax return with ease and confidence. Click here to read more or sign up directly for a free account.

Disclaimer – This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.

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