How do I report my cryptocurrency gains or losses?
If you sold or traded cryptocurrency (even for other cryptocurrency), you have a taxable event and must report it.
If you own cryptocurrency but haven't sold or traded it you don't need to report income on your return. You may need to file form T1135, and will need to report income when you do trade, so we recommend reading this post.
Step 1: Determine whether you have business income or capital gains
You need to determine whether you’re earning “business income” or "capital gains/losses".1 A simple way to look at it: the more actively you trade, and the more time you spend, the more likely you are to have business income.
There’s no line in the sand distinguishing business income from gains, but the CRA’s IT-479R lists factors that indicate you are carrying on a business:
frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,
period of ownership - securities are usually owned only for a short period of time,
knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,
security transactions form a part of a taxpayer’s ordinary business,
time spent - a substantial part of the taxpayer’s time is spent studying the securities markets and investigating potential purchases,
financing - security purchases are financed primarily on margin or by some other form of debt,
advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
in the case of shares, their nature - normally speculative in nature or of a non-dividend type.
If have business income, use the Business Income section to complete a T2125, otherwise use the Capital Gains and Losses section.
Step 2: Calculate your income/gain/loss
The CRA treats cryptocurrencies as commodities. To calculate your income/gain/loss you need track your adjusted cost base (ACB), your proceeds, and your outlays and expenses related to each trade.2
Your ACB is the total average cost (in CAD) of each unit of that cryptocurrency at any given time. Your proceeds are the fair market value (in CAD) of what you received for the disposition. Here’s an example of a simple situation where the taxpayer is trading two cryptocurrencies.
The taxable events are the two dispositions of XC and the one disposition of YC.
If you have capital gains, you can either transcribe each disposition into the Capital Gains (and Losses) table (select “Bonds, debentures, promissory notes, and other similar properties”), like this:
Or, you can enter the total cost, proceeds, and expenses, like this:
The CRA does not get a line-by-line breakdown through NETFILE, but may ask you to back up your amounts with records. Enter the full amounts in this section (SimpleTax automatically includes only the taxable half in your income).
If you are reporting business income, calculate your income in a spreadsheet and enter your gross revenue, costs, and expenses in the Business Income section. Learn more.
There are few services you can use to track your cost and proceeds. CRYPTOFINANCE is a Google Sheets plugin that might be very helpful. Our spreadsheet and adjustedcostbase.ca were built with Canadian tax rules in mind. If you are looking for something that has more historical information, consider the following sites: bitcoin.tax and cointracking. If you are using a U.S. site, make sure you are properly calculating your ACB (using the average cost and not FIFO or LIFO).
Due to the nature of the exchanges and the volatility of cryptocurrency, these amounts may not be perfect. As long as you ensure they are reasonable (and you are not being lazy or careless in your calculations) you are satisfying the requirements to properly report your income.
What about mining?
If you mine cryptocurrency, you are generating business income. We do not think the CRA will accept the position you are mining as a hobby. You can write off related expenses (like electricity). Use the Business Income section to report proceeds from mining.
What if I accept cryptocurrency as payment?
If you accept cryptocurrency as payment for goods or services, you are subject to the barter rules. You should record your income at the “fair market value” of the cryptocurrency at the time you receive the payment. If you are a GST/HST registrant, you need to collect and remit GST/HST in the same way as if you were being paid in cash.
You will have capital gains/losses (or business income) when you dispose of the cryptocurrency.
Do I need to file form T1135?
If you hold your cryptocurrency outside of Canada, it may be specified foreign property. If, at any time in the year, the cost amount of all of your specified foreign property exceeds $100,000 CAD you must file form T1135.
What if I don’t report my cryptocurrency income?
If you don’t report income and you are caught, you may be subject to the “Repeated failure to report income” and/or “False statements or omissions” penalties. These penalties can be very expensive and are described in greater detail here. You will also owe the tax and accrued interest on the income you didn’t report.
In most cases the CRA can only reassess you within three years from the date of your original assessment. For example, if you file your tax return on April 15, , and it is assessed on April 22, , the normal reassessment period will end on April 22, . However, if you made a misrepresentation on your return that is attributable to neglect, carelessness or willful default or have committed any fraud on your return there is no time limit; the CRA can audit and reassess you at any time.
Net business income is fully taxable, and net business losses can be used to offset any other income on your return. If you have business income, you can claim business expenses. Only 50% of your capital gains are included in your taxable income. Net capital losses can only be used to offset taxable capital gains. Net capital losses can be carried back three tax years or carried forward indefinitely if you are unable to use them up in a tax year.
Many people are surprised to learn that this level of detail is required and that you don't just calculate your income when you trade for fiat. The Income Tax Act makes it clear there is a taxable event whenever you dispose of property (which is what you do when you trade one cryptocurrency for another), there are no special exemptions.