The 2022 tax filing deadline is fast approaching. As a result, Canadian crypto investors are scrambling to file taxes, given the new regulations on cryptocurrencies. If you are one of these investors, please keep on reading to figure out what you should report on your taxes.
5 essential points you should take note of when filing your crypto taxes this year.
#1 Tax treatment for cryptocurrencies and NFTs
Cryptocurrencies and NFTs are considered digital assets, and are categorized differently from fiat currency. The Canada Revenue Agency (CRA) treats crypto assets similar to a “commodity.” This means that in certain circumstances, cryptocurrencies are liable for tax, and can be reported as a business income (if earned as part of business activities) or an investment capital gain (if earned with an expectation of profit). When cryptocurrencies, rather than fiat currency, are used to pay for goods or services, the CRA considers this a “barter transaction”. Barter transactions can result in income or expense, and can therefore be subject to taxes or provide a tax reduction. The CRA suggests that you keep a record of your crypto and NFT transactions when filing taxes. If you have several cryptocurrencies in your crypto wallet, make sure you value the cryptos separately. For example, “a Bitcoin is valued separately from a Litecoin.”
#2 How to file taxes for cryptocurrencies
“In general, possessing or holding a cryptocurrency is not taxable”. However, if you have sold cryptocurrency, traded or exchanged it for another cryptocurrency, converted your cryptocurrency to fiat currency, or used cryptocurrency to buy goods or services, you can be subject to tax. You will file crypto taxes along with your usual income taxes. It is important to note that tax considerations are different for every country, but entry level tax filers can consider using a tax reporting software to simplify the taxation process. In Canada, taxes are filed with the CRA. In other countries like the US crypto are only taxed after certain threshold are reached or depending on how long the cryptocurrency was held. Some countries also adopt a crypto-tax-free policy.
For individuals filing his/her 2021 crypto investment taxes, 50% of capital gain ( i.e. crypto sold at a higher price than acquired) is taxable on the amount you sold your cryptocurrency for. More on capital gains and losses are elaborated in #5.
#3 Where you can find more information on filing crypto taxes
More and more people are looking into acquiring cryptocurrencies. According to last year’s statistics, about 1.2 million Canadians now own crypto assets. Consequently, many are scrambling to file crypto taxes for the first time this year. If you are a Canadian filing crypto taxes this year, it will be useful to know where you can find more information. The most reliable source is the CRA, who creates guidelines and regulations for taxpayers. More information on filing crypto taxes, including how crypto tax is calculated, can be found here. Needless to say, turning to a tax professional to have a 360 view of potential tax gains or losses on your overall crypto and non-crypto income or activities is highly recommended.
#4 GST/HST applications to cryptocurrencies
Goods and services tax (GST) and harmonized sales tax (HST) is applied to the property or service that “is calculated based on the fair market value of the cryptocurrency at the time of the exchange.” For example, if a business wants to accept cryptocurrency as payment for goods and services, the value of the cryptocurrency exchanged for GST/HST purposes would be calculated based on its “fair market value at the time of the transaction”. In other words, ensure that all transactions are recorded and time stamped, so you can show proof of how you calculated the fair market value (i.e. reasonable value of the service or good) at the time of exchange. Likewise, just because you pay for goods and services using cryptocurrencies, does not absolve you from paying the usual 13% tax (in Ontario) on your purchase.
#5 What happens with capital gains and capital losses on cryptocurrencies
If you had sold cryptocurrency or digital assets last year for a profit, you will be subject to capital gain taxes this year. On the other hand, if you had sold cryptocurrency or digital assets last year for a loss, you can use this amount to offset your capital gains for any of the three preceding years.
Profit from cryptocurrencies can be determined in two ways, either as a business income or a capital gain. This is determined through whether the usage of cryptocurrency is for commercial or business purposes. Other forms of business income include crypto mining, trading and exchanges. If cryptocurrency is not used for any of the purposes listed under business income, then it will be calculated as a capital gain or loss. At the sale of a cryptocurrency resulting in a gain, 50% of the capital gain is taxable.
In conclusion, cryptocurrency taxes are separate from fiat currency taxes, since cryptocurrencies are considered a “digital representation of value that is not legal tender”. These digital assets operate independently from central banks, and require tax consequences of their own. When you are engaging in trading, buying or selling activities of crypto assets, remember to record and save all your transactions in order to effectively file taxes. More regulations are identified in whether you state your profits as capital gains or business income in #2. For more information on filing your crypto taxes this year, visit the Government of Canada and CRA website. To learn more about cryptocurrencies and what you can do with them, visit Innov-Edu for online courses!
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***This article is not meant to offer any tax, investment or trading advice. The author of this article is not a licensed tax, investment or financial advisor***