In the grand scheme of things, crypto is still an immerging technology. People are learning new things about these digital assets constantly.
Still, interest in this new way of life is growing. Some recent surveys show that people are interested in being paid via crypto for their goods and services. Most people used to associate the payment method as a more dubious and risky way to accumulate wealth, but today, cryptos are undergoing more common uses.
Of course, reality must arrive sooner or later. Though crypto is becoming a more widely accepted way to conduct transactions, users must also be aware of the rules, especially regarding taxation.
What are the things people need to know here? How is crypto taxed in Canada? Read on after the jump to find some insights on this topic.
Is Crypto Taxable?
Crypto is often referred to as digital money. At the same time, it can also be thought of as ‘online tokens’ or digital assets. The terminology can be somewhat confusing to those new to crypto, which may complicate whether they view it as ‘real’ money.
That said, the clue is in the name somewhat. Cryptocurrency can fast become real money, and therefore, it is safe to assume it is taxable. Consequently, newcomers to crypto must first understand that cryptocurrencies are taxable in Canada, with government guidelines clearly explaining this. Ignorance is no excuse not to make the appropriate contribution.
How people use crypto influences things here too. In the eyes of the Canada Revenue Agency (CRA), transactions can vary in definition and tax procedures. If a person does not trade crypto, their gains and losses will be perceived as capital. For those who do trade crypto or use it for business purposes, gains and losses are treated as income. Losses can be deducted. Using crypto for barter transactions, such as paying for goods and services, is also taxable.
Crypto traders will be taxed at the marginal income tax rate. Those dealing with capital will see half of their realised capital gains taxed at their marginal rate. In the end, individuals must report all gains and losses with the CRA.
How is Crypto Managed as Business Inventory?
If a business leader has crypto in their business inventory, the CRA demands that they value their own. Two trajectories can be explored here.
The first is that businesses involved partake in an annual valuation. The cryptos must be valued at their fair market value (FMV) at the end of the year.
Alternatively, entrepreneurs can value their crypto’s at FMV when acquired or at its current FMV later. They are permitted to choose whichever figure is lower.
Either option could be preferable for a firm, depending on their needs and manner of getting things done. They can prioritise paying as little as possible or keep to a timely schedule.
What About Mining Cryptos?
Some people do not trade cryptos but mine for them instead. Solutions to elaborate computing problems are required here, which uses a significant amount of electricity and processing power.
Mining for personal reasons is not currently taxable, likely due to the limited influence this would have on energy usage. The rules understandably change if an individual has more enterprising aspirations in mind, as there is a bigger cost.
Earning interest and mining new cryptos are also taxable endeavours. Newcomers to crypto should keep these things in mind as they proceed with their plans and report the income they receive. Crypto fans should do some further research around their personal circumstances if they’re uncertain about defining their activities and how much they should be taxed accordingly.
Can A Person Avoid Paying Crypto Tax?
Not paying tax is often thought to be a highly immoral thing. Things like tax avoidance, evasion, and dodging are all rightly punished in accordance with the law. That said, there is a small area of wiggle room when it comes to the taxation of cryptos.
Crypto enthusiasts will not be taxed on their cryptos if they merely hold them. They can store it safely in a digital wallet and keep it there cost-free. However, the moment they sell, trade, or convert it, that is when taxable implications come into effect, as previously discussed.
That said, it may be good for users to know that there is a figurative ‘pause’ button they can press to get their bearings. Much of trading crypto involves waiting for their value to change, which happens frequently. Therefore, traders can wait for their windows of opportunity tax-free.
Not every country taxes crypto gains. Territories like El Salvador and Portugal have more favourable rules, and Germany can be somewhat flexible with its tax laws on crypto. If people living in Canada are serious about their crypto investments, heading overseas might be a preferable arrangement.
Does The Crypto That’s Used Matter?
By now, everyone knows there are different cryptos. There is bitcoin, ethereum, and litecoin, to name a few. Each has a different value, which means considerations around tax can vary in turn.
Of course, the value of some cryptos can be turbulent at best. If one chooses to invest in crypto, then they must keep a close eye on how things fluctuate and how often. Bitcoin is often regarded as the most popular, but it can also suffer the most erratic downward slides imaginable. Ethereum can drop in value at times.
Because the variables are constantly changing here, the research one does around crypto values will be out of date rather quickly. If anyone wishes to trade, buy, or sell crypto, then timing those transactions is a huge part of the process that can affect tax expenses and much more.
What Resources Make Things Easier?
Because the world of crypto is tech-based and fast-moving, keeping up with taxation requirements alone can be a challenge. Fortunately, helpful support is out there.
Wealthsimple’s income tax calculator for Ontario is very useful for tracking income and accurately estimating what users owe. Their dynamic online resources also have a ‘Crypto’ section that can be accessed from their ‘Products’ dropdown menu. Here users can open an account and trade their cryptocurrencies safely and securely in their secure app. Wealthsimple is always adding new coins to their list, too.
Financial management matters can bring a lot of stress. This can be especially true for cryptos due to the amount of risk that can sometimes be involved. Having informative and helpful resources at a user’s disposal can help bring some peace of mind here and ensure they engage with cryptos as safely and responsibly as possible.
Which Records Must be Kept?
Of course, tax is not something that can be done on a whim. It’s a thorough process that requires preparation, hence the need for record-keeping.
Precision is needed in the data. Not only must the data of transactions be chronicled, but the value of the crypto in Canadian dollars at the time of the exchange should also be recorded. Software, legal, and accounting costs also need to be shared, along with exchange and digital wallet records.
As with all things tax-related, there is no room for half measures or oversights here. There is a lot of responsibility that comes with the use of crypto, and people must be as diligent as possible when collating all of their information. They would do well not to leave such endeavours to the last minute, too!
Fortunately, because cryptos are a digital asset, these admin procedures should be manageable due to records being easily found online via secure servers. In other words, it’s unlikely there’s any paperwork to be lost, which can make a huge difference in attitudes and understandings.
What If Things Go Wrong?
The prospect of incorrectly reporting taxable income is enough to make anyone nervous. Because cryptos are somewhat new in the grand scheme of things, and because there is much to remember, it would be understandable if a few oversights occurred.
If someone suspects something has gone wrong when reporting their gains and losses, they should refrain from panicking. Instead, they must take a moment to calm down and then try to file an amended return to the CRA at the earliest opportunity. That way, they should be able to rectify any mistakes they have made and seek clarification on what is required.
Individuals can also submit a voluntary disclosure to the CRA. This involves them being granted relief if they come forward to fix errors and omissions in their tax reports. They must do this before CRA finds out about the mistakes and contacts the individual to address them. Crypto enthusiasts should also expect them to judge each case individually.
Those dealing with crypto should contact a dedicated crypto tax specialist if they have any doubts about the process. These professionals can explain valuations and regulations concisely and provide ample support. The sooner help is sought after in these circumstances, the sooner important matters can be resolved.
Crypto tax in Canada can be a complicated thing to understand. Moreover, rules could be subject to change at points due to how new the technology is and how increasingly influential it’s becoming. Fans of crypto should keep tabs on the industry irrespective of their level of involvement, and they’ll never be blindsided by any developments in taxation laws.