Do I Pay Crypto Taxes in Canada

How Do I Pay Crypto Taxes in Canada?

Unlike in the United States where it’s based on short-term or long-term investments, Canada’s crypto tax laws are a bit different. Here’s a quick rundown of all the important details.

Crypto is Taxable

First off, let me start by saying that yes, cryptocurrency investments are taxable.

They are considered an income-generating activity, and thus, must be properly reported to the government. Furthermore, digital currency (although its name suggests otherwise) is treated more as a capital asset than actual currency.

Business Income vs. Capital Gain

Before we jump into the step-by-step process, you’ll need to first determine whether your investments are classified as business income or capital gain. Because there’s a very different way of computing taxes on crypto for each.

Now, how do we differentiate the two?

Business Income is defined as any earnings gained from an entity’s daily operations. That means that if you are trading under a company, registered as an investment firm, and you promote it, then it’s considered this.

Other indicators that may be considered are how repetitive your transactions are, and whether or not your intention is to make a profit.

On the other hand, Capital Gain is simply earning a profit when assets increase in value upon selling, trading, as payment for goods and services, or sending it to someone as a gift. Normally, if you don’t trade on a regular basis, and enter into any transaction as an individual, then it can be deemed as capital gain.

At this point, there seems to be a very fine line separating the two. Unfortunately for us, guidelines from the Canada Revenue Service won’t get any more specific. All they say is differentiating the two is done on a case-to-case basis. So if you need further clarifications, we recommend consulting with an experienced tax lawyer.

Income Tax Fees

Let’s assume that your activities as a crypto trader falls under the business classification. Simply deduct any company expenses (including allowances, payments for computer hardware, rent, etc.) from your gross revenue, and you’ll get your taxable income.

The next step will be to identify what bracket you fall under. Based on the CRS website, here are the Federal Tax Rates for 2023.

Federal Tax Rates for 2023

Remember, this is based on all your earnings for an entire year, not just from crypto.

Besides that, you also need to account for the Provincial Tax Rate, which varies depending on your area of residence.

Provincial Tax Rate

This is on top of the Federal Tax percentage you owe. That being the case, adding these two will now determine your total income tax responsibility.

To clarify things further, let’s use Allan’s case as an example. For his occupation, he is a financial investor, residing in Ontario, who reports $120,000 in income every year. Falling under the third category, your federal tax rate for this year is 15% on the first $50,197, 20.5% on the succeeding $50,197, and 26% on the remaining amount.

For the provincial rates, it follows the same computation. You will be taxed 5.05% on the first $45,142 of earnings, 9.15% on the succeeding $45,145, and 11.16% on the remaining amount.

taxes example

Therefore, after considering all those factors, Allan will be required to pay $32,644 in crypto taxes, or equivalent to 27.20% of his total annual earnings.

Capital Gain Tax

Computing for this follows the same format, except that only half of your capital gain is taxable.

But before that, remember that capital gain is the difference between an asset’s value now, from when you initially acquired it. The total increase is considered your capital gain, with half of it being the taxable amount.

To further explain this, let’s use our previous case as an example, this time assuming that $120,000 was his capital gain for all existing investments.

taxes example

So as you can see, only $60,000 becomes taxable. For federal tax, he pays 15% of $50,197 and 20.5% for the remaining amount. Then for the provincial income tax, he will be charged 5.05% of $45,142, and 9.15% for the last $14,858. The result is a capital gain tax of $13,178, or 21.96% of your initial investments.

How to Minimize Crypto Taxes in Canada?

For corporations or investment entities, the easiest way to reduce crypto tax in Canada is by declaring all possible expenses. This includes the cost of maintaining equipment, rent, utilities, and other payables that are incurred on a regular basis.

Moreover, the Canadian government allows you to declare a maximum personal allowance of $13,808. Donations to reputable charities are considered non-taxable, too, and thus, will be deducted from your total tax bill.

As a result of this practice, your total taxable income lessens. There’s also a chance you fall to a lower tax bracket, which means smaller rates, and more savings on your end.

Income Tax vs. Capital Gain Tax

As mentioned earlier, income tax and capital gain tax are both very similar concepts. So closely relative, even, that they are often misconstrued or interchanged with one another. Even the Canadian Revenue Service has difficulty explaining these ideas, saying that they will categorize applications for the two, on a case-to-case basis.

However, let’s do a quick run-through of what we know so far.

Income tax is an influx of cash brought about by a business venture. Although there’s no one all-encompassing indicator, some signs are present to provide more clarity on this matter.

On the contrary, capital gain is profit earned from the appreciation of a capital asset, upon being sold, traded, or given away. Activities under this category aren’t usually done on a daily basis and entered into by individuals. The main difference between this and income tax, at least from an accounting perspective, is that only half of your total capital gain over one year is taxable.

Knowing where each transaction falls under is important so you can pay the correct amount of taxes. Also, it will help strike the balance between your civic duty and responsibility in the household. You see, these rates are based upon a person or entity’s financial capacity, project expenses, and even expected profit.

It’s only objective is to create a win-win situation between traders and the government.

Crypto Capital Gain Tax Explained

Like we mentioned earlier, capital gain is the difference in value of assets now versus when you initially bought. That increase, under Canadian law, is liable to be taxes, and must be reported precisely on an yearly basis.

Once you have that number already, and deduct all possible expenses, you will come up with a final taxable amount. Search for the federal tax brackets of the existing year, check your provincial tax categories, add them together, then do a quick computation.

Once you do, you’ll have an estimate of how much taxes you need to pay the CRS.

Can I Take Advantage of Any Tax Breaks in Canada?

A tax break is defined as any entries in a financial statement that results in a reduction of taxes. Thankfully, the Canadian tax law has a couple of these that traders can use to their advantage.

First, only half or your capital gains are taxable. This means that if your crypto portfolio increases by $10,000, the CRS will only remit a percentage from $5,000. Just remember that this is only applicable for capital gain tax, and not for business income. The reason for this is based on context, this isn’t your main source of income, and thus, should not be taxed heavily.

Each time an individual donates to a registered charity or non-profit organization, the amount (or a portion of that) can be written off from your taxes. In a way, this serves as fulfillment of your social responsibility to the country.

Best Crypto Exchanges in Canada

If you’re thinking about beginning your trading career, consider signing up for crypto exchanges. These platforms provide a legitimate space to buy and sell digital assets. And because they are regulated by government organizations, you can be sure they strictly adhere to all existing laws and regulations. If you choose a crypto exchange with low fees, your trades will be more profitable.

Of course, not all crypto exchanges are perfect. Each one has their own set of strengths and weaknesses. At this point, we’d like to evaluate two of the most popular options available to help you decide which among them best fits your current needs.

Coinbase

Coinbase Review Open an Account

This platform is better suited for beginners, because of its basic interface and user-friendly commands. As a result, navigating through the website is fairly easy. They also handle a wide range of assets, which is most appealing, because it opens doors to a lot of opportunities.

Unfortunately, this comes at quite an expense - literally - since their transaction fees are quite high. Coinbase’s customer service leaves a lot to be desired. Several clients have complained how difficult it is to seek assistance.

Nevertheless, it provides a lot of value, should you find this setup suitable.

Binance

Binance Review Open an Account

Like its US counterpart, Binance in Canada faces a lot of issues, too. They have pulled out in several regions, and are currently regrouping to keep up with the ever-changing regulations of the CRS.

In general, their services seem to be sub-par and riddled with issues. It’s only silver lining is the affordable trading fees, which is one of the lowest around. At least whenever you earn more income, deductions are so much less.