How Digital Currency and Cryptocurrency Affect Your Taxes

What is digital currency?

“Digital currency” is a broad term that encompasses any form of currency that exists purely in digital or electronic form. Most people think of crypto, but other examples of digital currencies include electronic money systems, online banking systems, and central bank digital currencies (CBDCs).

Digital currencies are typically controlled and regulated by a central authority, such as a government or a financial institution.

What is cryptocurrency?

Cryptocurrency—aka “crypto”—is a subset of digital currency that uses cryptography for security. Unlike traditional digital currencies, cryptocurrencies are not issued or controlled by any central authority, instead they’re based on a network that’s spread out across many computers instead of just one. Because of this decentralization, there’s no worry of collapse at a single point of failure.

Cryptocurrencies are popular because money transfers are faster and cheaper and they rely on distributed ledger (blockchain) technology to record transactions and maintain the integrity of the currency.

Bitcoin, ethereum, and litecoin are examples of cryptocurrencies.

Is crypto taxable in Canada?

Yes, crypto is taxable in Canada. It’s considered property that can increase or decrease in value. So when you sell it, exchange it for another currency, or use it to buy items, you must report those values as capital gains or losses on your tax return.

Cryptocurrency transactions valued at $10,000 or more are automatically reported to the Canada Revenue Agency (CRA) by the applicable crypto exchange because it’s required to by law. But that doesn’t mean you don’t have to report transactions of less than that. You are required to self report all of your crypto transactions.

If you buy and sell crypto as a business, you’ll use form T2125 to report the income or losses from crypto. If you simply bought crypto once and decide to sell it when it gains in value, you’ll report that as capital gains on your income tax and benefit return, using Schedule 3.

When is crypto taxable?

Since crypto is unregulated and speculative, its value changes frequently.

Let’s look at three examples of how crypto is taxable:

• Buying and selling for profit: Investors can earn money buying and selling crypto, and the gains made from these activities are taxed as capital gains. The same is true if you simply spend crypto to purchase something.
• Purchasing goods and services: Let’s say you buy movie tickets using cryptocurrency. The CRA considers that transaction equivalent to bartering, thus you’re required to report the value of those movie tickets as income on your tax return.
• Giving crypto as a gift: So are crypto gifts taxable? Yes. If you give crypto as a gift, you must record the fair market value of that gift on your tax return. The same applies if you receive such a gift.

What about buying crypto, is that a taxable event? No—however, you need to make note of what you paid for it, so that you can accurately record the value difference when you dispose of it. Disposing of it just means you released it somehow. Perhaps you cashed out or you bought something with it.

Are cryptocurrency gains taxable?

Yes, cryptocurrency gains are taxable. That’s why it’s imperative that you keep good records about the value of the coins or currency when purchased, and the value when using or disposing of them.

If you record the gains on your personal income tax, they’re taxed at 50% of the gains made. If you file them as a business, however, 100% of the gains are subject to tax.

Let’s say that Joe’s friend, Jane, told him that crypto was a hot investment, so he decides to buy $5,000 worth. Eventually he likes how high the price has risen, so he sells it all for $8,000. His gain is $3,000. But since he is a casual investor, he only needs to pay capital gains taxes on 50%, or $1,500 ($3,000 / 50% = $1,500).

Jane regularly buys and sells crypto for profit. Whether she does this multiple times each day, week, or month, she is trading it as a business, so her income from crypto is taxed differently. Let’s say she buys $200,000 worth of crypto in total throughout the year, and her sales total $280,000. She made a profit of $80,000. Because she is doing it as a business, she must pay taxes on the full amount.

How are bitcoins taxed?

Bitcoins are taxed in the same way that all other cryptocurrencies are taxed. Bitcoin is simply one of hundreds of types of crypto-assets. Think of it like clothing. You can buy a shirt from hundreds of different brands. But, at the end of the day, you’re still buying a shirt.

Are NFTs taxable in Canada?

Yes, NFTs, or non-fungible tokens, are taxable when sold, traded, or otherwise disposed of. Like bitcoins, NFTs are simply another type of crypto-asset.

All cryptocurrencies are taxable

Canadian tax laws on cryptocurrency are established yet still evolving. Whether you dabble in crypto or you actively trade it—to earn income, accept it as payment, or use it as payment—those transactions are subject to capital gains taxes.