Canada has not legalized cryptocurrency as a tender, but Canadians are allowed to make purchases with cryptocurrency as long as the stores accept cryptocurrency as a mode of payment. This means that cryptocurrency can be used for conducting business, which is why there is a crypto tax in Canada. However, there are different forms of cryptocurrency taxes in Canada to consider.
1. Crypto Donations and Gift Taxes
Gifting cryptocurrency is perceived as a deposition of assets in Canada, which is why it is subjected to the capital gains tax. However, donating cryptocurrency to a registered nonprofit organization is not subjected to taxes.
2. Gifting Cryptocurrency
Whenever you give cryptocurrency as a gift in Canada, you need to pay capital gains taxes on profits because CRA considers it the disposition of assets. The gift recipient uses the asset’s FMV the same day it’s received. As far as the tax is concerned, you need to pay capital gains tax on 50% of the capital gain.
3. Donating Cryptocurrency
Donating cryptocurrency is completely tax-free in Canada, but it’s important to donate to a registered charity organization. It is better to confirm the registration status of the nonprofit charity organization on the Canadian government website. On the other hand, if you donate to crowd funders, you will need to pay taxes.
In addition, the donations can be leveraged to reduce tax bills if you are eligible for the charitable tax credit. This form of credit allows Canadian taxpayers to subtract a value of donations up to 75% of the annual income. Also, the unused donations can be carried for over five tax years.
4. Crypto Mining Taxes
If you are acting as an individual, you will be subjected to capital gains tax whenever you dispose of the mined cryptocurrency. On the other hand, if crypto mining is similar to business income, you will be subjected to pay income tax.
5. Mining as Hobby
If the CRA considers your cryptocurrency mining activities as a hobby, you won’t have to pay income taxes if you receive the mined coins. However, you will need to pay the capital gains tax whenever you dispose of the mined cryptocurrency by gifting, swapping, selling, and spending.
6. Mining as a Business
In case you are running a crypto mining business, your cryptocurrency will be considered inventory, and it has to be valued for paying the income tax. For this purpose, you could value each item at a fair market price or acquisition cost at the end of a fiscal year, depending on what’s lower, and pay the taxes accordingly.
In addition, you must remember that income generated from selling the mined coins will be a part of business income and will be subjected to taxes.
7. Crypto Staking Taxes
Some cryptocurrencies use a proof-of-stake mechanism as compared to the conventional mining process. Some of these cryptocurrencies include Cardano, Polkadot, and Solana. With the PoS mechanism, the traders have to stake their cryptocurrency to earn the rewards.
Staking through the proof-of-stake consensus mechanism is better for securing the blockchain, and you will also become a part of creating new coins and tokens. Since you are creating new coins and tokens, the CRA will view these earnings as eligible for income tax. The taxable amount will be calculated according to the FMV of tokens earned by staking the day they are received.
In addition, when you dispose of your tokens earned through staking, you will need to pay capital gains taxes. The base cost will be calculated according to the FMV on the date tokens were received, while the disposition price will be the FMV on the date you gift, spend, swap, or sell the tokens.
8. DeFi Taxes
There are no clear instructions shared by the CRA regarding DeFi investment, but that doesn’t mean you aren’t subjected to pay taxes on your decentralized finance (DeFi) investments. Instead, you need to read the current rules of crypto tax in Canada and assume the probable tax treatment of these investments.
For the most part, the tax treatment depends on whether the income is considered a capital gain or business income. For instance, if you trade cryptocurrencies regularly or make profits, it’s considered as an investment, which means the earnings will be taxed as an income rather than capital gain.
So, whenever you are earning cryptocurrency, it will be subjected to income tax, while capital gains tax will be imposed when you dispose of the currency. However, if you aren’t sure about the tax treatments, you could talk to tax accountants regarding DeFi investments, and they will guide you about the right way of filing taxes.
The Bottom Line
Filing and paying taxes on your crypto holdings and profits are essential in Canada, and the CRA is pretty clear that every crypto trader and investor has to keep proper records of the transaction, thankfully most of the well-known Canadian Crypto exchanges provide tax records. However, this type of taxation is still new, which is why understanding the above-mentioned categories will help you follow the proper taxation protocol.