There has been a lot of income generated from Cryptocurrencies such as Bitcoin, Ethereum and many meme coins. This is great news for investors and the Canada Revenue Agency (CRA) as the earnings will be taxed. It’s important to understand the tax impacts to avoid being caught of guard with a large tax bill. Below are tax concepts crucial for all Crypto investors to understand:
Trading
Gains from purchasing and selling Cryptocurrencies are considered capital gains in Canada, similar to trading stocks and equities. Half of the net gain is taxed at your marginal tax rate; the maximum effective tax rate would be 25%. Taxes are payable in the year in which the currencies are sold and are reported in the capital gains section of your tax return.
Here is an example:
Toronto Resident (TR) is a high-income earner; TR’s marginal tax rate is approximately 50%
TR purchases $10K in Bitcoin and sells it for $30K, the net gain of $20K is taxable
Since this is considered a capital gain only half of the gains are taxable, $10K is taxed
TR’s taxes payable is $5K, which is the $10K taxable capital gain at his marginal tax rate of 50%
Therefore, TR’s effective tax rate is 25%, $5K in taxes payable on $20K of net earnings
Staking and lending
Earnings from staking and lending your coins are taxable as regular income, similar to interest income. Income is taxable in the year in which it is earned. Using the example above, if TR earned $15K in income from staking, TR would owe $7.5K in taxes at a 50% tax rate. This is reported in the investment income portion of your tax return.
Mining, rewards, free tokens
Mined assets are considered unrealized gains and are taxable once they are sold or utilized for staking. The same concept applies to any tokens you are rewarded or given for free.
Crypto ETF Trading through a TFSA or RRSP account
There are many Crypto ETFs available on the stock exchanges that can be purchased through registered accounts and the same tax benefits apply. Crypto ETF earnings generated in a TFSA account are tax exempt, earnings generated in an RRSP account will be taxable at the time of withdrawal.
It is in your best interest to report your Cryptocurrency earnings and taxes accurately and put money aside for payment. Eventually CRA will identify ways to effectively audit the industry and wallets. Talk to one of our professionals today to get ahead and develop a tax strategy that works for you. If you are interested in speaking to one of our professionals, sign up with Fisherman Financial today for a free consultation.