Taxation of Cryptocurrencies
When it comes to investing in cryptocurrencies, most individuals are not
thinking about the tax side of things. And simply put, focusing on the tax side
isn’t usually top of mind when opportunities arise quickly for an investment,
especially in a cryptocurrency market with so much volatility.
However, sometimes trades and investment decisions are made that would result
in tax consequences. And to determine what the tax impact is, the first thing
to determine is whether there is a disposition for Canadian tax purposes.
Crypto to Crypto?
Determining whether there is a realized disposition for tax purposes is
essentially the starting point to determine whether there are taxes triggered.
If you were to ask a lot of people in crypto, many are not aware of what
constitutes a disposition for tax purposes. For example, do you realize a gain
when you convert your crypto to fiat? Do you realize a gain when you convert a
certain digital asset to stable coin or another crypto asset? Do you realize a
gain when you transfer from one crypto wallet to another crypto wallet? These
are important questions to consider to determine whether you have a realized
gain or not. A realized gain would be subject to tax in Canada.
The biggest misconception is that crypto to crypto trading is not a
disposition, however, CRA does provide some guidance around that. In fact,
crypto to crypto is viewed as a disposition since the CRA views this as a
barter transaction even though the asset is not sold for cash. Barter
transactions (i.e., exchanges of one non-monetary asset for another would be
considered a disposition and any unrealized gain on the initial asset that is
converted for another asset would be realized.
Trading Income or Capital Gain?
The second thing to determine what your tax situation for a specific taxation year looks like is whether your realized gain is business income or a capital gain. Generally, active trading, for example day trading, may be viewed as business income. Long term hold of a position for let’s say, greater than 1 year, may be viewed as capital in nature. Determining whether your crypto gains are active business income or capital gain income is important as it is taxed differently in Canada. A tax professional would be able to help walk you through the considerations for you to make that determination.
New proposed capital gains rules effective June 24, 2025
As of June 25, 2024, individuals have a $250,000 exemption where any capital gains are included in income at a 50% inclusion rate and then subject to tax at the individuals personal tax bracket. Capital gains above the $250,000 exemption will be brought into income at 2/3 (66.66%) and then subject to tax.
Active business income considerations
For active trading that is considered business income, the
entire trading income would be subject to tax net of trading expenses. This can
result in higher taxes if an individual is trading personally and is at a
higher personal tax bracket. However, if trading is done in a corporation in Ontario for active business income, this may result in a tax deferral through a corporation
as the small business corporate tax rate in Ontario is 12.2% on active business income on the first $500,000. The corporate tax
rate in Ontario on active business income above the first $500,000 is 26.5%. A corporate tax deferral may be achieved on the portion of retained earnings within the corporation. As such, the shareholder of the corporation would be subject to personal income tax when a salary or dividends are received from the corporation, which would then be taxable personally.
Best Strategy for you
The first thing to determine is your investment style and goals in the
cryptocurrency industry. Are you trading, long-term holding, or starting a
crypto business? All these involve different tax considerations on whether a
corporation makes sense or continue your activity personally. At MP Group, we
assist many clients in the blockchain industry on how to navigate through the
complexities of taxation with their crypto activity and involvement. MP Group
has been working on the tax and accounting side of the cryptocurrency industry
since 2015.
If you have any questions, please contact us and we would be happy to assist and guide you in the right direction.