Can the CRA track cryptocurrency? Better Know This in 2023
As a Canadian, it is essential to understand if the Canada Revenue Agency (CRA) can track digital assets and cryptocurrency transactions. Managing your tax affairs and keeping your taxable income in check is one of the most painful but important exercises.
The CRA currently treats cryptocurrency as a commodity, which means that capital gains tax applies to profits from cryptocurrency trades and sales. However, since there are no actual tax laws concerning digital assets yet, we have to navigate within a grey area around cryptocurrency.
As is the case with other tax authorities worldwide, we can’t be certain whether the CRA can track cryptocurrency trades, but one must assume that crypto transactions can be traced.
CRA Taxes on Crypto Income
On our quest to understand tax implications and if you have to pay taxes on a capital gain from transactions involving cryptocurrency, we also consulted with a professional Canadian tax lawyer. Getting a Canadian tax lawyer’s analysis can ultimately help you save time, money and lots of stress when it comes to filing your tax returns.
Since Canadian cryptocurrency traders are somewhat left in the dark whether they need to pay tax or report capital gains on digital asset transactions, it is imperative to understand how income tax treatment is typically established.
The Bank of Canada analysed cryptocurrencies in 2014 and determined that it does not meet their definition of “money” and is therefore considered not a currency like Canadian dollars, the greenback or euros, as examples.
The Canada Revenue Agency subsequently issued a guide explaining that any earnings from cryptocurrency transactions are treated as either a capital gain or even business income, depending on the individual circumstances.
What Cryptocurrency Transactions Are Taxable In Canada?
Any sale or transfer of digital assets is defined as a disposition. These dispositions include:
- Selling crypto for fiat money
- Trading / exchanging one crypto asset for another
- Using cryptocurrency to pay for goods and services
- Donating or using cryptos as a gift
Taxes on Buying and Selling Cryptocurrency
Whether you are merely buying and selling cryptos to make capital gains as an individual, in Canada, these activities may still be considered business income.
The distinction is essential because business income is taxable in full, but there is only a 50% capital gains tax applied to individuals. Of course, it would be worse to pay 100% tax on a $1,000 gain as business income instead of paying capital gains tax on just 50%.
Let’s look at a few scenarios to discover if your cryptocurrency transactions may be considered business income or not.
If you operate a business and you receive payments in cryptocurrency, then your earnings are undoubtedly business income. The amount of income is defined based on the fair market value of the cryptocurrency on the day(s) when you receive payment.
Canadian Taxes on Mining Cryptocurrency
If you engage in cryptocurrency mining, this could be considered a business or a hobby. The CRA does not provide much transparency or guidance here and rather decides on a case-by-case basis. If you sell the assets you mined, that income is taxable and most likely considered business income if you do this on a larger scale.
Staking cryptos may also have tax implications for Canadian taxpayers.
Some factors the CRA considers in determining whether your profits count as business income include:
- trading activity (frequency)
- the overall amount of time spent
- how long the crypto assets are held
- intention behind cryptocurrency transactions
- skill level required for the activity
How can you avoid tax on cryptocurrency in Canada?
Since January 1, 2022, all Money Services Businesses in Canada have to report the CRA of transactions greater than $10,000. This means if you send or withdraw $10,000 or more to or from a cryptocurrency exchange, it will be reported by the crypto exchanges to the CRA. The selling (disposing) of cryptocurrency will ultimately trigger a taxable event.
Even if you trade less than $10,000 at a time, the CRA will be aware of your cryptocurrency trading. If a cryptocurrency exchange is licensed and registered with FINTRAC in Canada, then they are required to verify you as a user and obtain a copy of your government-issued ID as well as proof of address. Your ID is thus linked to your account and wallet addresses on the crypto exchange.
Crypto exchanges often declare that the verification process is to protect you from fraud and money laundering, but these exchanges also disclose information to the Canada Revenue Agency.
Can the CRA track cryptocurrency?
The CRA can link you with wallet addresses, especially on crypto trading platforms, when you verify your account with a Canadian crypto exchange. Since most blockchains are public, anyone can view wallet addresses and their activity. Your transactions can therefore be linked to your wallets and your person. If you withdraw funds to your bank account, things get even more obvious.
If you use privacy tokens, decentralized exchanges or one that does not comply with FINTRAC regulations, then the chances are that the CRA may not be able to track your cryptocurrency profits or trades in general.
How do I cash out crypto without paying taxes?
You could buy or sell your cryptos on an exchange where you do not need to provide ID, then send your coins and tokens to another decentralized wallet. Decentralised exchanges and wallets are your friends in this case.
However, if you want to sell it and transfer fiat money to your bank account, then the CRA may want to know where that money came from. If the CRA cannot link you to your personal crypto wallets, then it becomes much more difficult to trace your activity.
The Consequences of Not Reporting Cryptocurrency Income to the CRA
We would like to suggest abiding by Canadian tax laws and report a capital gain or loss accordingly. The CRA does not take evasion on income or capital gains and money laundering lightly, and you could be in serious trouble if they find out you have tried to avoid income tax on your crypto. Unreported cryptocurrency income and cryptocurrency related tax evasion are one of the main issues global tax enforcement agencies are currently tackling.
Since blockchains are designed for record keeping, it is now fairly easy for the authorities to conduct tax audits and uncover taxpayers unreported income.
How do I keep track of crypto taxes?
Keeping track of all cryptocurrency transactions is a major concern Canadian taxpayers are facing today. Considering that every cryptocurrency transaction may have to be filed in an income tax return could be a major task when it comes to tax planning. Therefore, expert Canadian tax lawyers highlight the importance of keeping a good record of all crypto investments for income tax purposes.
Keep detailed records of your crypto-related activity for six years. For each transaction, include a date and definition (e.g., buy, sale, trade or transfer), the name of the cryptocurrency and its value at the time. This will make filing your tax return much easier.
How much tax will I pay on my cryptocurrency?
How much tax Canadian cryptocurrency users will have to pay on their crypto trades depends on many factors and if you have to pay income or capital gains tax on them. It is worth noting that a cryptocurrency transaction could also be tax deductible if capital losses were incurred.
If you have established that your crypto income is in fact business income and the return is in the negative, it is considered a non-capital loss, which can ultimately be deducted from any other sources of income you had in the relevant financial year (including from employment or investment earnings). This would, in turn, help lower the taxes you would have to pay.
If your income wasn’t high enough to make use of the loss deduction, you could carry back the non-capital losses up to three years and apply them to previous years’ tax returns, or carry them forward up to 20 years to reduce your taxes in the future. A tax professional can help you with the relevant procedures in case you are not too familiar with the rules.
Operating a crypto business could also help claiming business expenses and thus lower your crypto earnings overall.
Are NFTs taxable in Canada?
Yes, non-fungible tokens (NFTs) are taxable in Canada as the CRA applies the same rules as for digital currencies. It is best to keep detailed records of any NFT related transactions and consult a Canadian tax lawyer if there is any doubt. Most likely, you will have to pay capital gains tax on the buying and selling of NFTs.
Can I Invest in Crypto Tax-Free In Canada?
Canadian residents can take advantage of a Tax-Free Savings Account (TFSA). Any profits generated within such an account are tax-free. While Canadian cryptocurrency users cannot buy crypto directly in their TFSA, they can, for example, buy a Bitcoin Exchange Traded Fund (ETF) within their TFSA.
These Bitcoin ETFs track the price of Bitcoin and allow for a simple strategy to invest in BTC and its price development. However, keep in mind that they do not give you any ownership of Bitcoin, let alone any alternative crypto, and they are typically subject to high management fees. Below are the ETFs that currently trade on the Toronto Stock Exchange:
- Evolve Bitcoin ETF (EBIT)
- Purpose Bitcoin ETF (BTCC)
- CI Galaxy Bitcoin ETF (BTCX)
Our extensive analysis of the Crypto Regulation in Canada doesn’t stop here. You can also read our guide about the Best Crypto tax calculator in Canada and how the taxation on crypto works for Canadians.
Skrumble.com provides all its content for informational purposes only, and this should not be taken as financial advice to buy, trade or sell cryptocurrency or use any specific exchange. Please do not use this website as investment advice, financial advice or legal advice, and each individual’s needs may vary from that of the author. This post includes affiliate links with our partners who may compensate us.