How to calculate your crypto tax in Canada

You only need to take one look on Reddit to see how much confusion there is around crypto taxes. To add to that confusion is the very particular tax scenarios in Canada. Similar to many countries, cryptocurrency taxes are taxed in Canada as a commodity. However the CRA has a different method to most countries when calculating overall capital gains, using the Adjusted Cost Basis (ACB) when calculating capital gains from selling cryptocurrency.

It is important to note that the ACB is not the same as an average cost basis, since you need to apply the superficial loss rules. In addition there are a number of transactions that can be classified as income, and need to be declared on your income tax return. In this guide we help you understand these different rules and provide you with some clarity on how to handle your cryptocurrency taxes.

Before you begin calculating your crypto taxes you need to make sure you have accurate records of all your transactions in Canadian Dollars. So if you are trading on international exchanges you need to value these transactions in CAD using a consistent manner, such as by cross referencing rates on a local exchange. You will also need to record the date of the transaction; the receipt of purchase; the cryptocurrency wallet details involved in the transaction and relevant descriptions; the exchange records; and any accounting, legal, and software costs for managing your taxes.

When calculating the capital gains on cryptocurrency, the average cost of the cryptocurrency is used as a cost basis, and this is deducted from the proceeds to calculate the overall gain.

Simple example for Bitcoin

DateTradePriceQuantityTotal BalanceACBGain (Loss)
(1)1st JanuaryBuy1000221,000-
(2)3rd JanuaryBuy3000242,000-
(3)6th FebruarySell5000132,0003,000

We first buy 2 BTC with an average cost of $1000 each. We then purchased an additional 2 BTC. Note the The average cost goes up to $2000 per unit of BTC at (2). We then sold 1 BTC at $5000. Our cost basis was $2000, making the total gain $3000. This is recorded as a capital gain for tax purposes.

Given the simple example above, you might think it is smart to “realise” a capital loss when the price of Bitcoin dumps, and immediately buy it back to realise a capital loss in this tax year. This tactic is known as “tax loss harvesting”, and to circumvent this the CRA introduced the superficial tax loss rule. If you buy the cryptocurrency in a 30 day window either side of the sell transaction, that sell transaction is ignored and the original cost basis is reapplied.

Example 1: Buying back within 30 days

Violation of superficial loss

DateTradePriceQuantityTotal BalanceACBGain (Loss)
(1)1st JanuaryBuy5000225,000-
(2)3rd FebruarySell3000200(4,000)
(3)4th FebruaryBuy3000223,000-
(4)Next yearSell10,00020014,000

We buy 2 BTC with an average cost of $5000. We then sell 2 BTC realising a loss of $4000 in this tax year and cleverly re-buy the 2 BTC the next day with the hope of selling this for a gain in the future, and use the capital loss to maximize our current purchasing power. Next year we quit work and go travelling, thinking (incorrectly) that we have minimized our overall tax bill.

Apply superficial loss

DateTradePriceQuantityTotal BalanceACBGain (Loss)
(1)1st JanuaryBuy5000225,000-
(2)3rd FebruarySell30002000
(3)5th FebruaryBuy3000225,000-
(4)Next yearSell10,00020010,000

The important thing to note here is that (1) does not realise a capital loss. Instead the original ACB is reapplied from (1) to (3) and the loss of $4,000 is realised in (4) bringing the overall gain down to 10,000.

Example 2: Selling within 30 days

Another way you might think you are being smart is by buying more Bitcoin when the price dumps, thereby lowering your overall average cost basis, and then immediately sell it to lock in a lower capital gain. But the CRA has this covered as well.

Violation of superficial loss

DateTradePriceQuantityTotal BalanceACBGain (Loss)
(1)1st JanuaryBuy5,000225,000-
(2)5th JanuaryBuy1,000243,000-
(3)6th JanuarySell1,000223,000(4,000)
(4)Next yearSell10,00020014,000

We buy 2 BTC with an average cost of $5000. When the price drops we buy 2 more BTC lowering the average cost to $3,000. We don't actually want this much exposure, so soon after we sell 2 BTC to realise a capital loss of $4,000 in this financial year. Later on next year we sell the remaining 2 BTC, realising a gain of $14,000.

Apply superficial loss

DateTradePriceQuantityTotal BalanceACBGain (Loss)
(1)1st JanuaryBuy5,000225,000-
(2)5th JanuaryBuy1,000243,000-
(3)6th JanuarySell1,000225,0000
(4)Next yearSell10,00020010,000

With the application of the superficial loss rule, at (3) we are no longer realizing a loss in this financial year. Instead our average cost from (1) is reapplied and we realise all losses next year in transaction (4).

The CRA has not yet clarified how staking is taxed. However we can look to other regions and similar instruments to get an idea of the most likely scenario. Staking itself is very similar to depositing money into the bank and earning interest, so at CryptoTaxCalculator our software will separate out staking as income earnt. You can then talk to your accountant about how to correctly categorise this, or reach out to the CRA for an individual assessment.

Once you have earnt income from staking, this initial price forms the cost basis for your capital gains or loss. This way you are not “double taxed”. For example if you receive $10 of ETH for staking, and later sell the ETH for $100, your income is $10 and your capital gain is $90.

Similar to Staking, we treat airdrops as income earned based on the market value of the transaction at the time of receipt into your wallet. Although the CRA has not clarified taxes on airdrops, this is in line with other tax regions and is the most conservative position. You can check with your accountant to make sure that this is the right calculation for you. We break this out as a separate category in the CSV export so that your accountant can modify this if required.

Lending involves loaning out cryptocurrency and usually being compensated in the form of interest. Similar to staking, we treat interest earnt as income. You also need to be careful because if you disposed of the cryptocurrency by receiving another token this could arguably trigger a taxable event. Make sure you check with your accountant before you unknowingly increase your tax burden.

Mining has different tax implications depending on whether you are a hobby or business miner. For hobby mining CryptoTaxCalculator will calculate your initial cost basis as zero dollars. When you later sell the cryptocurrency the entire proceeds will be added as a capital gain.

All content in this article is general information only and does not constitute financial, tax or legal advice. It is not intended to be used by anyone for the purpose of financial advice, legal advice, tax advice, tax avoidance, promoting, marketing or recommending to any other party any matter addressed herein. For tax, financial or legal advice please consult your own professional.

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