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Cryptocurrencies continued to move into the mainstream last year, with the launch of the first U.S. bitcoin exchange-traded funds and as prices surged on U.S. President Donald Trump’s pro-crypto stance. And as more Canadians adopt cryptocurrencies as an alternative form of investment, there are important tax implications to watch for, experts say.
“Crypto is becoming less speculative and being used much more effectively as a store of value now,” said Nicholas Mersch, portfolio manager with Purpose Investments in Toronto.
“Bitcoin often exhibits price movements independent of mainstream markets, especially during periods of high macroeconomic uncertainty,” Mr. Mersch said. “The best way to compound capital over long periods is if you can buy it, hold it, and don’t have to sell it because then that triggers [tax] events,” he said.
The CRA currently views crypto holdings as commodities, classified as either investment assets or payment instruments, both of which can trigger a capital gain or loss at the time of sale.
Unbeknownst to the average taxpayer, barter transaction rules apply when using crypto as a form of payment. If you traded bitcoin in exchange for your neighbour’s old truck for example, your bitcoin is considered “sold,” and you may be faced with a tax bill (assuming bitcoin’s value appreciated since you acquired it).
Kyle Mackenzie, partner and head of crypto tax at Metrics Chartered Professional Accounting in Victoria, sees this knowledge gap among his clients. “A lot of people coming to us don’t realize that [even] if you were to trade between different cryptocurrencies, that’s a taxable transaction,” he said.
Tax professionals like Mr. Mackenzie say keeping documentation of all your crypto transactions is key, citing an accountant’s nightmare when exchanges go bankrupt like in the case of Canadian cryptocurrency trading platform, QuadrigaCX.
“When these exchanges go down, people lose a lot of [trading] information, and then we end up filling gaps,” Mr. Mackenzie said. “We always tell our clients to record everything once a month or just download all of your information every quarter at least.”
Owen Clarke, a Calgary-based tax lawyer with Borden Ladner Gervais, who advises crypto investors and businesses through CRA audits and related tax disputes, said that while the CRA is looking to catch individuals who may be skirting income-reporting obligations, the majority of the cases he deals with are around substantiating the losses claimed by his clients.
“Sure, you can provide Excel reports from your crypto exchange, e-mail correspondence or even bank transfers, but our experience has been that auditors have the discretion to accept those or not,” he said.
So even if capital gains from crypto trading are appropriately reported, the CRA can disallow the deductions against those gains on the basis of insufficient evidence, Mr. Clarke said. In order to lessen the risk of litigation or a long, drawn-out tax dispute, he recommends dealing with established exchanges that can provide records that are more likely to be accepted as legitimate to support any claims for capital losses on crypto.
The decentralized nature of digital asset trading and potential for tax evasion has called for advancements in the regulatory environment. A recent example is the OECD’s development of the Crypto-Asset Reporting Framework (CARF) in 2024, a new set of guidelines for exchanges, wallet providers, brokers and even crypto ATM operators to provide user data to tax authorities. This third-party reporting requirement can initiate more audits down the road, Mr. Clarke said.
Salaries paid in crypto are considered a non-cash benefit for the employee and is subject to income tax. Individuals in this scenario will need to not only report income from their T4s but also capital gains or losses associated with the crypto asset when it’s converted to cash.
Another tax consideration is selling underperforming crypto assets at a loss to offset gains from other investments. But Candy Davis, a chartered professional accountant and adviser on crypto tax compliance based in Spruce Grove, Alta., notes that in this case, it’s important to understand the “stop-loss” rule, which prevents taxpayers from claiming a loss on the sale of a crypto asset if they acquire the same or identical asset within 30 days.
Mr. Mersch, whose firm offers crypto ETF products, recommends crypto newbies consider bitcoin ETFs for its tax advantages. “Buying the ETF directly in your investment account lowers the fee and friction of having to do this directly on an exchange,” he said. “If you wish to buy and sell bitcoin and do so in your TFSA or RRSP, you will not be taxed on capital gains in these accounts.”
Finally, Ms. Davis advises hiring a tax expert if you’re involved with any crypto activity because the chances of getting audited are high. “It’s such a new area and the CRA is really only learning by doing audits,” she said.
