How is Crypto Taxed in Canada?
Allan Madan, CPA, CA
In today’s video, I will help you understand how Crypto-assets, like Bitcoin, are taxed in Canada.
Business Income vs Capital Gain
The profit made from crypto-assets is taxed either as business income or capital gains income.
Business income is fully taxable at your marginal tax rate, whereas capital gains income is only half-taxable.
For example, suppose Sam, a Canadian resident, made a profit of $60,000 from the sale of Bitcoin. Sam has a large annual salary, and his marginal tax rate is 50%. If the profit is treated as business income, the full amount of $60,000 will be included in Sam’s income and he will pay
$30,000 of personal income tax. However, if the profit is treated as capital gains income, only 1/2 or $30,000 of the profit will be included in Sam’s income and he will pay $15,000 of personal income tax. Sam’s preferred tax treatment is capital gains income, because of the tax he will save.
| Business Income | Capital Gains Income | |
| Profit Made | $60,000 | $60,000 |
| Taxable Amount | $60,000 | $30,000 (1/2) |
| Tax Payable @ 50% | $30,000 | $15,000 |
Factors – Business Income vs Capital Gains Income
What determines whether the profit made from the sale of a crypto-asset is business income or capital gains income? The CRA uses several factors to help you make this determination.
(1) Frequency of the transactions – that is the number of buys and sells you make in a day, week or month. A higher trading frequency makes it more likely that the profit made is ‘business income’ and not a ‘capital gain’.
(2) Period of ownership – If you hold the crypto-asset for a short period, for example, a day, then it’s more likely that the profit made is ‘business income’ and not a ‘capital gain.’
(3) Knowledge of securities markets – if you work in the finance industry or have a certification, designation, degree or diploma in finance or accounting, it’s more likely that the profit made is ‘business income’ and not a ‘capital gain.’
(4) Time spent – If a significant part of your time is spent studying the securities markets and investigating potential purchases and sales, then it’s more likely that the profit made will be taxed as ‘business income’ and not a ‘capital gain’.
(5) Financing – If purchases of crypto-assets are financed primarily on margin, a line of credit, a mortgage, or other debt, then it’s more likely that the profit made will be taxed as ‘business income’ and not a ‘capital gain’.
| FACTOR | BUSINESS INCOME | CAPITAL GAIN |
| Frequency of Trades | High | Low |
| Length of Ownership | Short | Long |
| Financial Education | High | Low |
| Time Spent | High | Low |
| Leverage | High | Low |
What is a ‘sale event’ for tax purposes?
There must be a ‘sale event’ or disposition of the crypto-asset for the profit made to be taxable, either as business income or capital gains income. So when does a disposition occur? A disposition can happen in the following circumstances:
(1) You exchange your crypto asset for Canadian or US dollars or another currency.
(2) You trade your crypto-assets for another type of crypto-asset, like trading Bitcoin for Ethereum.
(3) You use your crypto-asset to buy goods or services.
(4) You gift or donate your crypto-asset.
Let’s look at Sale Event #2 more closely, a crypto-for-crypto trade. For example, assume Donnie purchased one bitcoin for $15,000 several years ago, and it’s now worth $50,000.
Donnie would like to trade her one bitcoin for 20 units of Ethereum, worth $2,500 per unit.
Donnie is a day trader, and this is her full-time business. She is in the highest tax bracket so her marginal tax rate is 50%.
How much tax will Donnie pay for trading her one Bitcoin? Donnie made $35,000 of business income, and so she will pay $17,500 of personal income tax.
| Sale Amount | $50,000 |
| Cost | $15,000 |
| Profit | $35,000 |
| Tax Payable @ 50% | $17,500 |
Transferring a Cryptocurrency to an Exchange or Trading Platform
Be Careful when you transfer a cryptocurrency that you own to another exchange or trading platform. In certain cases, the transfer can result in a sale event, and therefore personal income tax on the profit made becomes payable.
Let’s look at Jane’s case. Jane transfers the bitcoin she owns to an account she opened at The Best Crypto Trading Platform. This platform pays her a fixed return of 5% each year, payable in bitcoin. The terms and conditions are as follows:
- The platform can hold Jane’s bitcoin in its name and can sell or lend Jane’s bitcoin without informing her
- The profit made from the use of her bitcoin belongs to the Platform
- Jane can make a withdrawal at any time
- The amount paid to Jane upon withdrawal can be from the bitcoin belonging to another customer of the Platform
In Jane’s case, the CRA determined that a sale event occurred when Jane transferred her bitcoin to The Best Crypto Trading Platform because she effectively gave up ownership and control of her bitcoin to the Platform.
Conclusion
In conclusion, you need to understand whether you are earning business income or capital gains income from the sale of crypto assets and what constitutes a sales event or disposition.
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.
ABOUT THE AUTHOR
ALLAN MADAN
CPA, CA
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
