Taxation in the cryptocurrency space is still a grey area that requires clarification by tax regulators. Only a few countries have established taxation rates after recognizing cryptocurrencies as an asset class. Canada falls under this category and this article will highlight its cryptocurrency taxation laws.
The Canada Revenue Agency is the organization tasked with assessing and collecting taxes for Canada in accordance with their laws. It acknowledges crypto as a commodity and not as legal tender, securities or currencies, and the four are differentiated below:
- Commodities – A commodity is a good that is interchangeable with other goods of the same type
- Securities – Interchangeable and tradable financial instruments used to raise capital
- Currencies – Systems of money that are in use in particular countries
- Legal tender – Coins or banknotes that are recognized as part of a country’s official currency
Income accrued from cryptocurrencies is classified either under:
- Business income
- Capital gain or
- Barter transactions
and it is taxable.
Notably, merely possessing and holding crypto; donating crypto to charities; being gifted crypto; transferring crypto between one’s wallets and purchasing crypto with fiat is not taxable.
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For taxation purposes, crypto barter transactions involve the use of crypto to pay for goods or services and the vendor is required to convert the crypto value into Canadian dollars then report it as business income or capital gain or loss.
Business income accrues when one:
- Mines crypto
- Runs exchanges and Automated Teller Machines (ATMs)
- Is paid in crypto
- Trades crypto on exchanges (exchanging crypto for fiat or another crypto)
- Undertakes crypto activities in a commercial or business like manner
- Stakes crypto
- Promotes services or products and shows tenacity by intending to make profits even when it’s highly unlikely in the short term
Such income is subject to Federal Income Tax or Provincial Tax when applicable. This varies depending on the rate of earnings and ranges between 15% – 33%.
Capital gains accrue when one makes a sale that does not constitute carrying on business and the amount increases to be more than the original price. This definition is quite vague and the regulator needs to elaborate on that classification to ensure it adheres to clarity, a principle of taxation.
At the moment, it seems to be a blanket definition that covers any group not regarded as business income. With respect to capital gains, only half of the gains are subject to tax and this is a great incentive for crypto investors from the regulator.
The Capital Gains Tax rate is the same rate as the Federal Income Tax rate only that it will be charged on half of the taxpayers gains. Before calculating this, one must offset the capital losses against the gains. If there are no capital gains to be offset against, the losses can be carried forward to the next financial year.
To avoid taxation claims, taxpayers are encouraged to keep records of their transactions and export them from exchanges periodically. That way, any disagreements can be amicably resolved with supporting records.
It’s key to note that in Canada – and Kenya – one is required to keep financial documentation for a period of at least six years from the end of their tax year for audit purposes.
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RECOMMENDED READING: CRYPTO LEGAL GUIDE: The Cryptocurrency Regulatory Framework in Kenya by Global Legal Insights
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