Introduction
With cryptocurrency trading on the rise in Canada, understanding tax obligations is essential for traders to stay compliant with Canada Revenue Agency (CRA) regulations. Whether you are an occasional investor or a full-time trader, your crypto gains, losses, and trading activities must be reported properly to avoid penalties and audits.
This guide explains how crypto trading is taxed in Canada, whether your gains are classified as capital gains or business income, and how to correctly report your transactions.
1. How Cryptocurrency is Taxed in Canada
The CRA classifies cryptocurrency as a commodity, meaning that crypto transactions are subject to capital gains tax or business income tax, depending on the nature of your trading activities.
a. Capital Gains vs. Business Income
The classification of crypto transactions depends on factors such as trading frequency, intent, and reliance on trading as a source of income.
1. Capital Gains Tax (Occasional Traders & Long-Term Holders)
- If you trade occasionally or hold crypto as a long-term investment, your gains are taxed as capital gains.
- Only 50% of your capital gains are taxable, making it a tax-efficient option.
- If you incur capital losses, only 50% of those losses can be deducted, and they can only offset other capital gains (not regular income).
2. Business Income Tax (Frequent or Professional Traders)
- If you trade frequently with the intent to generate regular profits, your crypto gains are classified as business income.
- 100% of your profits are taxable as business income.
- Unlike capital gains, business losses can be deducted against other income.
- You may be eligible to deduct business-related expenses such as trading fees, software costs, and internet expenses.
Since tax classification impacts your total tax liability, determining whether you qualify as an investor or a trader is essential.
2. Keeping Track of Your Crypto Transactions
Proper record-keeping is crucial for accurately reporting crypto income. The CRA requires traders to maintain detailed records of every transaction.
Essential Transaction Records
For each trade, document:
- Date of transaction
- Type of cryptocurrency involved (Bitcoin, Ethereum, etc.)
- Transaction amount (in CAD)
- Fair market value (FMV) at the time of transaction
- Trading fees or commissions
- Purpose of the transaction (e.g., buying, selling, trading, staking)
Using crypto tax software like Koinly, CoinTracker, or Accointing can help automate record-keeping and tax reporting.
3. Calculating Capital Gains or Business Income
Step 1: Determine Your Adjusted Cost Base (ACB)
- The ACB includes the original purchase price of your cryptocurrency plus any associated costs (trading fees, gas fees, etc.).
- If you bought the same cryptocurrency at different times, use the average cost method to calculate ACB.
Step 2: Calculate Proceeds of Disposition
- This refers to the amount received when selling or trading cryptocurrency, minus any transaction fees.
Step 3: Determine Your Gain or Loss
- Capital Gain = Proceeds of Disposition – Adjusted Cost Base
- If your gains are capital gains, only 50% is taxable.
- If your gains are business income, 100% is taxable.
Step 4: Report Gains or Losses on Your Tax Return
- Capital Gains: Report on Schedule 3 (Capital Gains or Losses).
- Business Income: Report on T2125 (Statement of Business or Professional Activities).
Accurately reporting these details prevents audits and tax reassessments by the CRA.
4. GST/HST Considerations for Crypto Traders
If your crypto trading is classified as a business, you may be required to register for GST/HST if your taxable sales exceed $30,000 CAD over four consecutive calendar quarters.
How GST/HST Applies to Crypto Trading
- If you provide crypto-related services, such as trading on behalf of others, you may need to charge GST/HST on your services.
- You may also be eligible to claim input tax credits (ITCs) for GST/HST paid on business expenses.
Since GST/HST rules for crypto businesses are evolving, consulting a crypto tax expert is highly recommended.
5. Reporting Foreign Crypto Exchanges and Offshore Holdings
If you trade on foreign cryptocurrency exchanges or hold crypto assets outside of Canada, you may be required to report them to the CRA.
Form T1135 – Foreign Income Verification Statement
- If you hold over $100,000 CAD in foreign crypto assets, you must file Form T1135 to disclose these holdings.
- This applies to crypto held on foreign exchanges, offshore wallets, and international trading platforms.
Since the CRA actively tracks offshore crypto holdings, failure to report can lead to penalties and audits.
6. How to File Your Tax Return as a Crypto Trader
When filing your tax return, ensure all crypto-related income is accurately reported.
Tax Forms for Crypto Traders
- Schedule 3: For capital gains/losses from occasional trading.
- T2125: For business income from frequent trading.
- Form T1135: For foreign crypto holdings above $100,000 CAD.
Since crypto taxation is complex, consider working with a tax professional specializing in crypto accounting.
7. Penalties for Failing to Report Crypto Transactions
The CRA actively enforces crypto tax compliance, and failure to report crypto transactions can result in penalties, interest, and tax audits.
Potential Penalties
- Failure-to-File Penalty: 5% of unpaid tax, plus 1% per month for late filings.
- Gross Negligence Penalty: 50% of unpaid taxes if income is deliberately omitted.
- Tax Evasion Investigation: Falsifying records can lead to criminal charges and severe financial penalties.
Since the CRA obtains data from crypto exchanges, ensuring full compliance is crucial to avoid legal and financial risks.
8. CRA Voluntary Disclosure Program (VDP): Correcting Past Crypto Filings
If you failed to report crypto income in previous years, the CRA Voluntary Disclosure Program (VDP) allows taxpayers to correct tax filings before an audit begins.
Benefits of the CRA VDP
- Reduces penalties for unreported crypto income.
- Helps avoid CRA audits and reassessments.
- Allows taxpayers to correct tax returns without facing legal action.
Since the CRA continuously monitors crypto activity, voluntary disclosure is strongly recommended if past transactions were unreported.
9. FAQs on Filing Crypto Taxes in Canada
Q1: How does the CRA classify crypto trading?
- Occasional trading = Capital gains tax (50% taxable).
- Frequent trading = Business income tax (100% taxable).
Q2: Do I have to report crypto if I only trade on foreign exchanges?
Yes. The CRA taxes worldwide income, including gains from foreign crypto exchanges.
Q3: Can I deduct trading fees and expenses?
- For capital gains: No, trading fees are included in the ACB calculation.
- For business income: Yes, expenses like software, internet, and commissions may be deductible.
Q4: What if I forgot to report crypto income from past years?
You can correct past filings through the CRA’s Voluntary Disclosure Program (VDP).
Conclusion
Filing taxes as a crypto trader in Canada requires careful record-keeping and compliance with CRA regulations. Understanding whether your gains qualify as capital gains or business income is crucial for minimizing tax liabilities.
Key takeaways:
- Determine if you are an investor (capital gains) or a trader (business income).
- Maintain detailed records of all crypto transactions.
- Report all taxable crypto gains, losses, and offshore holdings.
- Use CRA Voluntary Disclosure if past income was unreported.
If you have any questions or require further assistance, our team at Block3 Finance can help you.
Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.
You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses.