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Bitcoin & Crypto Taxes in Canada
Updated June 7, 2020
In this guide, you will learn everything you need to know about bitcoin and cryptocurrency taxation in Canada. We cover how to calculate your taxes, how to minimize your capital gains, and what is required to be reported by the Canada Revenue Agency. You will also learn how to generate and file your crypto tax reports.
Coinpanda is provided for informational purposes only. We do not guarantee that our understanding of the cryptocurrency tax rules detailed below is in fact correct, or up to date according to the latest regulations. This service is not intended to substitute for tax, audit, accounting, investment, financial, nor legal advice. Please see our full disclaimer.
1. Crypto taxation in Canada
The Canadian Senate reviewed the issue of taxation of cryptocurrency already in 2014 to address the growing popularity. The Canadian Revenue Agency (CRA) has published guidance to help Canadians understand the tax implications of cryptocurrencies better.
The CRA considers bitcoin and other cryptocurrencies to be a commodity with regards to taxation. In general, each disposal of a crypto is a taxable event:
- Selling of cryptocurrency and you receive fiat currency (such as Canadian dollars)
- If you trade or exchange cryptocurrency (includes also crypto-to-crypto transactions)
- Gifting cryptocurrency to another person
- Use cryptocurrency to pay for goods or services
It should be clear now that if you have bought and sold bitcoin (or another cryptocurrency), you probably have to report this in your annual tax return to the CRA.
Income from cryptocurrency transactions is either treated as business income or as capital gains. Business income is treated differently for tax purposes than capital gains.
The CRA lists some common signs that your activity may be classified as a business:
- You carry on the activity for commercial reasons
- You undertake activities like a business. This might include preparing a business plan and acquiring capital assets or inventory.
- You promote a product or service
- You have intentions to make a profit (even if you are unlikely to do so in the short term)
In most cases, a business activity needs to involve repetitive actions over time. If you are a day trader you will therefore most likely be considered to carry on a business.
2. How to calculate capital gains
A capital gain occurs when you sell a cryptocurrency for more than the original purchase price. On the other hand, if the sales price is lower than the purchase price, it is considered a capital loss. Only half of the capital gain is subject to tax in Canada, and you can also use any capital losses to offset your capital gains.
To calculate the capital gains you need to first establish the cost basis for the cryptocurrency you are disposing of. In Canada, you need to use Adjusted Cost Base (ACB) which is simply the average purchase cost of all coins you have in possession. The capital gain for each transaction is then determined as the ACB value subtracted from the selling price.
We will look closer at how to calculate the cost basis (ACB) together with some practical examples later in this guide.
3. Buying, Selling & Trading
Buying and selling cryptocurrency can have different tax implications in Canada. In this Section, we will break down the current tax rules more in-depth and also explain with practical examples.
Buying cryptocurrency (Ex: CAD → BTC)
This is not considered a taxable event. Note that it’s important to keep track of all your purchases and complete transaction history so that you can calculate your cost basis and deduct the costs when you later dispose of the assets.
Selling cryptocurrency (Ex: BTC → CAD)
Selling cryptocurrency such as bitcoin for fiat currency (e.g. CAD) is considered a taxable event in Canada which is similar to most other countries. If you have done so, you will need to work out the capital gains for each transaction.
The CRA states clearly that each individual cryptocurrency is a separate asset and should be valued separately.
– Selling cryptocurrency
Jacob bought 0.4 BTC for $2,000 in 2017. One year later he buys 0.2 BTC for $3,500. Now, Jacob owns a total of 0.6 BTC which he has paid a total of $5,500 for.
In January of 2020, Jacob decides to sell his entire investment. He sells 0.6 BTC and receives $7,000 in exchange. His transactions can be seen in the below table:
|Type||Date||Amount||Price||Cost Basis||Capital Gains|
To calculate his capital gains, Jacob needs to find the total cost basis for the 0.6 bitcoin he has sold. This is simply the total initial cost ($5,500) since he is now selling his entire investment. The total capital gain is then found as $7,000 – $5,500 = $1,500.
|Type||Date||Amount||Price||Cost Basis||Capital Gains|
Half of his capital gain is subject to tax (taxable capital gain = $750) which he needs to report on his tax return to the Canadian Revenue Agency.
Trading cryptocurrency (Ex: XRP → ETH)
Trading cryptocurrency for another cryptocurrency is no different than selling with regards to taxation. The CRA sees this as a barter transaction, and you have to determine the value in Canadian dollars at the time of the transaction.
Normally, the fair market value of the acquired cryptocurrency is used to determine the sales proceeds for each trade transaction.
Transactions with stablecoins (Ex: LTC → TUSD)
Stablecoins such as Tether (USDT), TrueUSD (TUSD) and Paxos (PAX) are treated similarly to any other cryptocurrency by the CRA. Because of this, all transactions with stablecoins are therefore taxed in a similar fashion to trade transactions like already explained.
– Trading cryptocurrency
Emma bought 20 litecoin in 2018 and paid $800. In 2019, she decides to exchange 5 of her litecoin for 3.5 ethereum. At the time of this transaction, 3.5 ethereum was valued at $500. Now, how can Emma calculate her capital gains?
We already know the value of her sales proceeds which is $500. The original acquisition price (cost basis) can be found as 5 / 20 * $800 = $200. Her capital gains are then found as $500 – $200 = $300. 50% of the gains ($150) are considered taxable capital gains which Emma needs to report on her tax return.
4. Margin & Futures Trading
It has become very popular to trade cryptocurrencies on margin the last few years, and many popular crypto exchanges offer this like BitMEX, FTX and Bybit for example. Instead of buying or selling cryptocurrency you actually own, margin trading lets you borrow funds from the exchange to speculate if the price will go up or down in the future. The former is often referred to as going long, while the latter is going short. Futures and derivates trading works in a similar fashion, ie. you borrow funds when you make a purchase or sell order.
When you trade futures on an exchange like BitMEX, you will open a position each time you make a buy or sell order. When the position is closed, you will have made either a gain or loss.
The Canadian Revenue Agency has not yet issued tax guidance for the treatment of margin/futures trading specifically, but the safe approach is to include the gains or losses in your total capital gains calculations. A crypto tax solution like Coinpanda calculates your capital gains for margin trading automatically so you don’t have to do this manually.
5. Taxable income from Mining & Staking
Mining of cryptocurrency
The bitcoin blockchain is secured by what we refer to as miners. By using specialized hardware to solve complex mathematical equations, miners make it possible for me and you to transfer bitcoin and trust that it will be sent to the rightful recipient without the use of third party service. To incentivize miners to do this (also called Proof-of-Work), they are rewarded with newly created bitcoins and also the fees paid for each transaction.
Cryptocurrency received as payment for mining is subject to tax treatment in almost all countries, with Canada being no exception. Again, the tax treatment depends on whether your mining activity is classified as a business or just a hobby. If you are mining crypto such as bitcoin or ethereum with the intention of making profits on a regular basis, you will most likely be considered conducting business activity and the crypto received will be taxed as business income.
You can normally deduct any directly associated costs like electricity and computer hardware from your mining income. You should also be aware that when you decide to sell the coins later, the sales proceeds will become part of your business income and taxed as such.
If your mining is just a personal hobby, you will only pay capital gains tax when you later sell (dispose of) the received coins. Because you didn’t pay anything for the coins originally, the cost basis should be considered as zero so that your capital gains are equal to the market value (in CAD) at the time when you sell the coins in the future.
The CRA says that it will be decided case by case if your activity is classified as a business or just a hobby.
Staking of cryptocurrency
The Canadian Revenue Agency has not released specific guidance for staking of cryptocurrency. Because staking is similar in nature to mining of cryptocurrencies, the safest approach is to treat received coins from staking in a similar fashion to mining.
6. Tax on Airdrops & Hard Forks
Tax on Airdrops
Airdrop of cryptocurrency tokens is often done as part of a marketing or advertising campaign. In some cases, you will need to register before a deadline to become eligible to receive tokens. You may also receive tokens just from holding another cryptocurrency in your wallet or on an exchange.
The CRA has not issued specific guidance to the tax treatment of cryptocurrency airdrops, but a safe approach is to pay capital gains tax when you later decide to sell the coins. Similar to crypto received from mining, you should assume a cost basis equal to zero because you did not pay anything to acquire the coins.
Tax on Hard Forks
Blockchains, e.g. the bitcoin blockchain, need to be updated from time to time. Such updates can result in a soft fork or hard fork. Updates that automatically get adopted by all participants is called a soft fork. This does not result in the creation of new tokens or a new blockchain. A hard fork, on the other hand, can result in a blockchain split where new tokens come into existence.
Bitcoin Cash is an example of a hard fork where all miners could not agree on whether to adopt the proposed change or not, and the bitcoin blockchain was split as a result. Everyone that owned bitcoin at the exact time when the split happened would then receive an equal number of Bitcoin Cash.
The Canadian Revenue Agency has not provided specific guidance for how cryptocurrency received from hard forks should be treated for tax purposes. Again, a safe approach is to pay capital gains tax when you later decide to sell the coins and assume a cost basis equal to zero similar to airdrops explained above.
In most cases, Coinpanda classifies airdrops and hard forks automatically when you import your transactions from a wallet or exchange. On the Tax page, you will see a total overview of your crypto received as income, airdrops, hard forks, etc.
7. Tax on ICOs & IEOs
ICOs (“Initial Coin Offerings”) and IEOs (“Initial Exchange Offerings”) are a popular form of raising capital by companies and projects launching their own blockchain or token. In both cases, a person typically invests in a token that will be released in the future and pays with another cryptocurrency like bitcoin or ethereum.
An IEO differs from an ICO by being held on an exchange, and the token is in most cases listed on the exchange shortly after the IEO has concluded.
The Canadian Revenue Agency has not provided specific guidance for the treatment of ICOs or IEOs, but since this is very similar to a crypto-to-crypto transaction, we can treat such transactions similarly for tax purposes. If you invest in token XYZ and pay with bitcoin, you will have to calculate capital gains on the bitcoin disposed of. You will need to use the fair market value of bitcoin on the date you made the investment which will also become the cost basis for the newly purchased tokens.
8. Cryptocurrency Gifts & Donations
The tax treatment of gifting and donating cryptocurrency is not mentioned in the cryptocurrency taxation guidelines from the CRA. If you have ever gifted crypto like bitcoin to another person, or made a donation to a charity, we recommend that you contact the CRA directly or speak to a professional tax consultant in Canada.
9. Cryptocurrency Loans
The CRA has not mentioned the tax treatment of crypto received as interest specifically. Again, a safe approach is to apply the same practice as used for cryptocurrency received from mining, staking, airdrops or hard forks. This means you will calculate capital gains only when you sell the coins in the future and assume an acquisition cost equal to zero.
10. Tax on income as Cryptocurrency
Today, some employers are paying salaries in cryptocurrency instead of fiat (like CAD) to their employees. The CRA states that crypto received as payment for salary or wages will be included in the employee’s normal income. This means you need to pay income tax according to subsection 5(1) of the Income Tax Act.
The same rules can be assumed to apply for both employees and freelancers. In both cases, the fair market value is determined on the date of receipt.
11. Superficial Loss Rule
To prevent investors from taking advantage of capital losses, the CRA has put a superficial loss rule in place. Section 54 of the Income Tax Act indicates that a superficial loss occurs from selling cryptocurrency when both of the following two conditions are met:
- During the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the “substituted property”) that is, or is identical to, the particular property, and
- At the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property,
This might sound confusing, but simply put it means that a capital loss cannot be claimed if you buy the same cryptocurrency either 30 days prior to, or after, the disposition (when it was sold). Without this rule, a taxpayer could reduce his or her tax burden by selling a cryptocurrency, trigger a capital loss, then immediately buy it back shortly after.
It is important to mention that it is not illegal to buy back the crypto shortly after you have sold it. However, you need to make sure you are not claiming a capital loss for transactions where the superficial loss rule kicks in.
If you want to avoid the superficial loss rule altogether, you simply need to wait. You will need to wait at least 30 days before you sell a crypto after purchasing it, and also 30 days before you buy back the same crypto you have sold.
See this article for more information about the superficial loss rule and the potential consequences when calculating and reporting your capital gains to the CRA.
12. Foreign Property
If you during any time of the year hold specified foreign property valued greater than CAD 100,000, you are required to report this by filing a Foreign Income Verification Statement. This also applies to cryptocurrencies which means you need to file this form if the total value of your crypto assets exceeds the threshold during the tax year.
13. Minimize your Taxable Gains
There are several ways you can minimize your taxable gains and tax liability. In this Section, we will look at the three most commonly used methods that are allowed in Canada.
Deduct cryptocurrency losses
If you sell a cryptocurrency and receive less than the calculated acquisition cost using ACB, you will have realized a capital loss on the asset. Such losses can be used to offset your total capital gains for cryptocurrencies, or capital gains for other capital assets like shares or index funds.
It’s important to be aware that capital losses cannot always be claimed due to the superficial loss rule already discussed (Section 11). Also, you are allowed to deduct only 50% of the losses, similar to how you are paying capital gains tax on only 50% of your gains.
Most exchanges charge trading fees when you buy, sell or trade cryptocurrency. Trading fees are considered deductible costs that can be deducted from the sales proceeds amount.
If you have a large number of transactions, deducting the fee amount can make a significant impact on your total tax liability. Most crypto tax solutions like Coinpanda does this automatically for you.
Lost and stolen cryptocurrencies
It is not clear today how the CRA treats lost or stolen cryptocurrency. However, most countries allow the taxpayer to deduct the original cost from their capital gains if they have been a victim of fraudulent actions or permanently lost access to their private keys.
We recommend that you ask a certified tax professional in Canada if this applies to you.
14. How to file your tax reports
Filing and reporting cryptocurrency taxes can sound complicated and intimidating at first. The whole process can be summarized in the following 6 steps:
- Download the transaction history from all exchanges where you have bought or sold any cryptocurrency. To calculate your cost basis correctly, it is important to include the history for ALL previous years.
- Review your transaction data and make sure that the calculated balance matches your actual portfolio.
- Look up and assign market rates to all transactions which do not include Canadian dollars (Ex: ETH → LTC). This is required to calculate the cost basis correctly.
- Determine the cost basis value for each transaction according to the Adjusted Cost Base method (ACB). Remember the possible implications of the superficial loss rule.
- File your crypto taxes before the deadline. You can file your taxes either online or complete a paper tax return.
This can be a very tedious and complicated process for most people that have had more than a few transactions during the year. Most crypto investors prefer to use a cryptocurrency tax solution such as Coinpanda to help them with calculating and filing their annual tax report. Coinpanda simplifies this process by carrying out steps 1 to 4 automatically.
15. Record keeping of transactions
The CRA puts the responsibility of keeping records of all transactions on the taxpayer itself. Many cryptocurrency exchanges keep these records for a limited time only, so you should make it a habit to periodically export and save this information. You are required to keep records of all transactions and supporting documents for a minimum of six years following the last tax year they relate to.
As stated in the Guide for cryptocurrency users issued by the CRA, you should keep the following records on your transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs
Coinpanda’s tax product can create a capital gains report with most of this information for you.
If you are a miner, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, and maintenance costs)
- the mining pool details and records
16. Crypto tax deadline
The tax year in Canada is from January 1 – December 31. If you are completing your tax return for 2020 it needs to be filed by April 30 the year after, in this case, 2021.
17. How can Coinpanda help?
Coinpanda is a cryptocurrency tax solution built to simplify and automate the process of calculating and filing your crypto taxes. Coinpanda lets you do this in four simple steps:
- Import all your transactions using API keys or CSV files
- Verify that your data is matching (and make necessary adjustments if required)
- Coinpanda calculates your capital gains for each cryptocurrency
- Download a tax report that can be submitted to the CRA
Get started for free to find out more.
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