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Unless you’re a Siberian hermit, you probably noticed that crypto had a big 2021 — with the total market cap of all tokens hitting $3 trillion, a roughly four-fold increase over 2020. More interesting is the fact that a lot of the money that poured into crypto last year belonged to newbies who previously hadn’t traded crypto at all. So, given all the fresh new cash flowing into the crypto world, it’s really no shock that a lot of questions have cropped up among traders about taxes and decentralized currencies.
To help keep the Canada Revenue Agency (CRA) off your case and to avoid bungling your tax return, we dug through social-media sites, namely Reddit and Twitter, and identified seven increasingly common crypto tax myths and misconceptions. Then we asked Wealthsimple’s in-house tax whiz Nik Hayward to debunk the nonsense.
1. The CRA Can’t Track Your Crypto Assets
OK, you might be thinking, cryptocurrencies were designed to be unregulated and anonymously owned, so the government can’t track how much I bought and sold, right? This widely held view is partially correct: cryptocurrencies were indeed designed to be anonymously owned and free of government meddling. But, Hayward explains, as cryptocurrencies went mainstream last year, the CRA won a decisive court battle to obtain customer data from the crypto exchange Coinsquare, and the CRA now coordinates, to some degree, with other exchanges, to help it track the movement of digital assets. (Currently, Wealthsimple does not submit crypto information to the CRA, but that could change in the future.)
So it’s important to actually, you know, pay your taxes. Otherwise, the CRA could send you a bill for the balance owed, plus an additional 50% of the understated taxes, or $100, whichever is greater. Not good either way.
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2. You Can Give Crypto to Friends and Family Tax-Free
The big thing to understand when it comes to cryptocurrencies and taxes is that, in most cases, the CRA treats crypto as stock and crypto profits pretty much just like capital gains — aka the difference between what you bought it for and what you sold it for. So anytime crypto changes hands, Hayward says, “that’s a taxable event,” and you’re responsible for reporting it.
For one reason or another, however, a number of Redditors seem to think that you can transfer crypto to a friend or family member tax-free. Not true if you’re Canadian, says Hayward. In reality, you are responsible for reporting and paying taxes on all crypto transactions, including gifts to friends or family. (FWIW, the only time you can move crypto assets around tax-free is if you transfer coins from one of your wallets to another, provided you don’t buy, sell, gift, or purchase anything along the way.)
This sounds like a lot of tax, right? One nice thing about Canada is that the federal government taxes only 50% of your capital gains. So if you profit $100, the government pretends you only made $50 and taxes you on that. The CRA has an exhaustive webpage about capital gains and crypto if you care to dive deeper.
3. You Don’t Have to Pay Taxes on NFTs
In #2 above, we talked about how the CRA treats crypto profits like capital gains, right? Well, Hayward says, the same thing applies when you use crypto earnings to buy other digital assets, such as NFTs. That’s because once you’ve “cashed out” of crypto in any way, shape, or form, there’s a tax implication. (The Internal Revenue Service is warning our neighbours to the south about paying taxes on NFTs, too, so the CRA isn’t alone on this.) Here’s a quick example: let’s say you buy $100 worth of crypto, and then over a year’s time the value grows to $200. If you then use that $200 to buy an NFT, you still need to pay taxes on the $100 capital gain from your initial crypto investment, even if you don’t convert your crypto to CAD, since you’ve “disposed of” your crypto, in accountantspeak.
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4. Crypto Is Always Taxed Like Capital Gains
OK, there are two big exceptions to the whole crypto-profits-get-treated-as-capital-gains thing we discussed. And that’s if you get paid in cryptocurrencies or mine them yourself. If that’s you, the CRA will consider your crypto earnings as income, not as capital gains, says Hayward, and tax you accordingly. And by that we mean at a higher rate. If, for instance, you earn $1,000 through crypto trading, and your tax rate is 25%, you’ll end up with a tax bill of $125 on those funds, or 25% of $500. (Remember how we said Canada taxes only 50% of capital gains?) If, though, your boss pays you $1,000 in crypto as part of your salary, you’ll have a tax bill of around $250 since the entire amount, not just 50%, is taxable.
Another way crypto gets treated as income, not capital gains, is if you trade it in a “businesslike way,” according to the CRA, meaning beyond a hobby. So if day-trading crypto is your full-time job, that’s you. Again, the CRA has a detailed webpage about the nuances of this stuff if you care to really wonk out.
5. You Can Avoid Taxes by Hiding Your Crypto Outside the Country
Another piece of bad information circulating on social media is that you can hide your gains by transferring crypto assets outside the country, or by becoming a non-resident, or by leaving the country altogether. None of these strategies is advisable, and not only because Canada is a great place to live and paying taxes is a thing all responsible adults should do, but also because none is terribly effective.
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First, ditching the country or changing your residency status comes with its own departure taxes, which apply to income you made in the country before leaving and pretty much negate any crypto tax benefit you’d gain from going expat. Second, the CRA has been working with international partners to track crypto assets around the world. Want to know more about these international partnerships, how they work, and where there might be blind spots? Too bad, because the CRA is playing its cards close to the chest on this one. The CRA, Hayward says, has some tools and techniques to retrieve information from financial institutions around the world, but is light on publicizing the specifics, for obvious reasons.
6. Only the Feds Care About Your Crypto Profits
This is less a myth that needs busting than a fair warning: so far in this article, we’ve been mostly talking about federal taxes, but provinces have their own taxes that they tack onto your bill, and your crypto profits are fair game. Tax rates vary widely by province and territory — you can see a full list here — so you definitely want to look up your rate well before filing day to ensure you have enough cash on hand to pay your bill.
7. You Can’t Claim a Crypto Loss to Reduce Your Taxes
Bitcoin and Ethereum shot up by 70% and 450% over the course of 2021, respectively. But let’s say you made the unfortunate decision to put the entirety of your life savings into SHIBA at its October peak and sold at the end of the year after it lost more than 42% of its value. Well, a tiny sliver of good news in such a scenario is that the CRA lets you apply the losses against other capital gains, helping to reduce your tax bill.
For instance, if you lost $10,000 on Coin #1, but gained $15,000 on Coin #2, your $10,000 loss on Coin #1 gets applied to the Coin #2 $15,000 gain, resulting in a $5,000 total gain — half of which you’ll have to pay gains on (because, again, Canada only counts 50% of capital gains as income). You might also want to take a hard look at your investment strategy, but that’s beside the point.
Jared Lindzon is a freelance journalist and public speaker with regular columns in Fast Company and The Globe & Mail.
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