Maximizing Tax Returns: A Step-by-Step Guide to Filing Crypto Taxes in Canada

Wondering how to report crypto taxes in Canada to maximize tax returns? In this post, we will simplify the tax filing process through a step-by-step guide and also provide answers to some commonly asked questions regarding crypto taxation in Canada.

Let's dive in!

How are cryptocurrencies taxed in Canada?

Cryptocurrencies are taxed in Canada when you make profits by selling your cryptocurrency to a third-party, earning cryptocurrencies via airdrops or forks, exchanging one coin for another, gifting someone your crypto assets, or using your cryptocurrencies to pay for goods/services.

Steps to report your crypto taxes in Canada

Step 1: Calculate your crypto profits/losses

The first step to filing your crypto tax returns is to calculate your profits and losses on all your crypto transactions for the year under review. You will need the prices of all the coins in your wallet, the date you first purchased the coins, and the fair market value of each of the coins as of the time you disposed of them.

If you trade on more than one exchange, you should also put the data into consideration. Once you are through with the calculations, you can then enter the data into form T2125 (for business taxpayers) and Schedule 3 (for individual taxpayers).

You can see that doing this manually can be cumbersome. So the easiest way to calculate your crypto profits and losses is to use a reputable crypto tax software.

Step 2: Complete form T2125 and Schedule 3

The next step is to complete form T2125 and Schedule 3. Form T2125 is also known as the Statement of Business form, while Schedule 3 is widely known as Capital Gains or Losses tax form.

Form T2125 is for reporting your business or professional income and expenses. This form also comes handy when calculating your gross income and your net income (loss). This is a requirement if you are completing the Federal Income Tax and Benefit Return in Canada. Form T2125 is also part of the T1 income tax package that you require to file your personal income tax.

So, complete the form as applicable and don't miss any details.

Step 3: Capture all crypto earnings

If you earn cryptocurrencies through airdrops, mining, staking, interest, or forks during the financial year, make sure you include them in the tax form. According to the CRA, these earnings are subject to income tax.

Step 4: Complete the process

If you have reported your capital gains/losses and income, you can then proceed to complete the remaining aspect of the tax returns. Review the form for possible omissions, submit it to the CRA, and you're good to go.

How to calculate crypto Income Tax

Unlike when calculating capital gains where only 50% of your capital gain is subjected to capital gains tax, when it comes to crypto income tax, taxpayers are required to take the fair market value of the crypto in CAD on the day you they receive it to calculate how much they will pay as crypto income tax. Please remember that when reporting the crypto income tax, you will apply the Federal and Provincial Income Tax rates to the net amount.

When is the crypto tax deadline in Canada?

According to the Canada Revenue Agency (CRA), the deadline for filing taxes is April 30th every year. But if you are self-employed, that is you own your own business, the deadline is June 15th. You will be getting into troubles with the CRA if you don't report your taxes on or before the deadline.

How to report cryptocurrency on taxes in Canada

Here's how to report cryptocurrency on taxes if you are a taxpayer in Canada:

File your crypto taxes as part of your annual Income Tax Return.
Report crypto income on Income Tax Return T1
Report capital gains/losses on Schedule 3 Form

How can I reduce my tax liabilities?

There are several ways to reduce your tax bill during tax time. First, you can minimize your crypto exposure by adopting the tax-loss harvesting strategy. This strategy involves selling off your non-performing cryptocurrencies at a loss position and using the proceeds to offset your capital gains. Secondly, you can reduce your tax bill by donating appreciable cryptocurrencies to qualifying charity organizations. And lastly, by investing in crypto assets in a self-directed individual retirement account (SDIRA).

How much does the CRA take as tax on cryptocurrencies?

The CRA is mandated by the Income Tax Act to only take 50% of your capital gains/losses. So, when reporting your taxes, don't leave out any capital gains/losses. Whether you incur a loss or not, still report it.

Summary - Use a tax software

Doing tax computation can be complicated. It is even more complicated reporting crypto taxes manually when there is crypto tax software that can help you complete the process in minutes. Crypto tax software is designed to automatically access your exchanges or wallets, do all the heavy lifting on your behalf, and generate a complete tax report that you can then submit to the CRA.

Frequently asked questions

How will the CRA track my cryptocurrencies transactions

While cryptocurrencies are not an official legal tender in Canada, the tax authority treats it as a commodity, which is taxable under the Income Tax Act. So, if you fail to report your taxes at tax time, the CRA has modalities in place to track down tax defaulters. The CRA is empowered under the Income Tax Act to track cryptocurrencies by gathering KYC data of traders or investors from registered crypto exchanges.

Is there a limit to the amounts of cryptocurrencies I should report?

No, there is no limit to the amount of cryptocurrencies you should report on your tax forms. So long as you are involved in a crypto currency transaction and incurred either a profit or loss, the CRA expects you to file your crypto returns on or before April 30th every year.

Crypto gifts and donations tax treatment?

According to the CRA, gifting cryptocurrencies to your friends or family members is considered a disposition, and is subject to capital gains tax. In essence, you will pay a capital gain tax on any profit if you gift your cryptocurrencies to someone. During tax season, the recipient will use the fair market value of the cryptocurrencies and the day they received the asset as their cost basis should they want to sell the asset in the future. On the other hand, donating cryptos to approved charity organizations has complicated tax consequences.

What if I lose money, should I still pay taxes?

Of course, you still need to pay taxes even if you incur a loss in your cryptocurrency transaction. However, the losses sustained can translate into a huge tax benefit, which include using the losses to offset your capital gains.

What are the crypto tax rates in Canada?

Unlike in the US, where there are both short and long-term capital gains tax rates, Canada has no such thing. Crypto capital gains are taxed using the same rate as Federal Income Tax and Provincial Income Tax. Note that Professional traders pay a 100% tax rate on their total capital gains while individual traders are subject to a 50% rate.

Below is the Federal Income Tax bands (CAD) for 2022:

15% on your first $50,197 of taxable income
20.5% on taxable income between $50,197 and $100,392
26% on taxable income between $100,392 and $155,625
29% on taxable income between $155,625 and $221,708
33% on taxable income of $221,708 or more

Are there any penalties for not reporting my taxes?

Yes, there are penalties for not filing your tax returns on or before April 30, a day which the Canadian CRA set as the deadline for taxpayers to complete their tax processes. The penalties include a heavy fine or imprisonment.

Disclaimer: This content was written by a third party and should not be considered as tax advice. It’s best to always consult with your accountant or tax professional.