John Sicilia works in the hospitality industry and began investing in cryptocurrencies in the early days of the COVID-19 pandemic. He got involved because he was curious and saw an opportunity.
“People have made quite a bit of money from crypto, so it was interesting for me to see if I could jump in and catch something before it all got too big,” he says.
In Canada, the industry is continuing to grow. As of 2021, 14 per cent of Canadians own or have owned cryptocurrency, according to an online Ipsos poll of more than 2,100 respondents released in October. Of those survey participants, 70 per cent hold or held Bitcoin and 41 per cent hold or held Ethereum. In addition, one in four respondents were considering buying digital currencies in the future, according to the poll results, which cannot be assigned a margin of error because it was completed online.
When Sicilia started dabbling in the cryptocurrency space, he was admittedly not thinking about tax implications because of the decentralized nature of digital assets.
But because cryptocurrencies are viewed as property in Canada, investors could owe taxes to the Canada Revenue Agency depending on the situation.
Now that Sicilia has made some money, he is looking to withdraw for the first time and is really starting to think about the tax implications.
Like any investment, you aren’t taxed if you simply acquire or hold cryptocurrency. The tax implications kick in when you dispose of it. That includes selling or trading it, giving it as a gift, converting it to a currency like the Canadian dollar, or using it to purchase goods or services.
Cryptocurrency earnings are treated as a capital gain or business income, meaning that you will have to pay capital gains tax or income tax. If your earnings qualify as capital gains, 50 per cent of profits are taxable. For business income, it is 100 per cent.
“We don’t have a set of simple rules on how to deal with cryptocurrencies, so you’re relying on older principles from the Income Tax Act,” says Rob Jeffery, tax partner at Deloitte Canada and the firm’s national policy leader who works with individuals and corporations in Canada.
What matters for your tax bill is the nature of the crypto investment in the first place, the hold time and frequency of trading, Jeffery explains.
“If I make one investment and hold it for several years and then dispose of it, that would clearly be capital gains, but if I’m sitting at home, buying and selling cryptocurrency all day every day like I’m running a business, that could be treated as business income and therefore be subject to a higher rate of tax,” he says.
The Canada Revenue Agency considers each taxpayer’s case individually.
After speaking with Sicilia and others about what they are curious about and want more clarity on, a few questions stood out:
How much tax do you pay when you dispose of your crypto?
Tax rates vary based on the individual’s other sources of income and province of residency. An individual resident in Ontario with $50,000 of other taxable income would pay capital gains tax of approximately 15 per cent (on the next $30,000 of taxable income), whereas an individual in Ontario in the top marginal tax bracket (i.e. other taxable income in excess of $221,708) would pay 26.76 per cent.
Using the first scenario, if someone in Ontario with $50,000 of other taxable income bought a cryptocurrency for $2,000 at the beginning of 2021 and sold it several months later for $5,000, the result would be additional income tax of $450, Jeffery says. ($3,000 gain x 15 per cent capital gains tax rate.)
What are the tax implications if you transfer your crypto into a chequing account or Registered Retirement Savings Plan (RRSP)?
“A sale of cryptocurrency for Canadian dollars, which in turn is transferred into a chequing account or an RRSP, would be considered a disposition for income tax purposes,” Jeffery says
What if you want to use crypto to buy a non-fungible token (NFT)?
Purchasing an NFT is taxed the same way purchasing another cryptocurrency would be, according to Jeffery. Both events involve disposing of crypto.
When paying for a personal trip using crypto, is this treated as business income?
This scenario would involve disposing of crypto and therefore be a taxable event. Whether it counts as business income or capital gains depends on the nature of the crypto investment, Jeffery says.
If you bought Bitcoin at $5,000, transferred it to another wallet when it was at $50,000, then transferred it to another wallet when it was at $35,000, what are the tax implications?
Assuming cryptocurrency was held by the same individual and there was not a conversion between types of cryptocurrency, there would be no dispositions, according to Jeffery.
“The example provided is similar to moving shares of public companies between investment accounts at different brokerages,” he says.
To be prepared for tax season, Jeffery suggests cryptocurrency investors save their records from whatever exchange they are using and make sure they provide full disclosure of any business income and capital gains when filing independently or working with a tax professional.