Is Crypto Taxed as Capital Gains or Business Income in Canada?

Many people who hold crypto-assets are surprised to learn that selling, swapping or spending them can create a tax bill. The first question is how the CRA classifies your activity, because that decides how much of your profit is taxed.

This article explains the factors the CRA looks at, what counts as a taxable event, and how a gain is worked out. Your pattern of activity matters a great deal, so treat this as a guide to the questions to ask.

This article covers Canadian federal tax law, which applies in every province.

Capital gain or business income: why it matters

Income from crypto transactions is generally business income or a capital gain, depending on the circumstances. The difference is large. Business profit is fully included in income, but only half of a capital gain is taxable. The taxable half of a gain is one-half of the capital gain under the Income Tax Act.

A net taxable capital gain is added to your other income and taxed at your marginal rates, not at a separate flat rate.

How the CRA decides

For crypto, the CRA points to several factors that lean toward a business:

• How often you transact.
• Short holding periods.
• Market knowledge.
• Time spent studying markets.
• Debt financing.
• Advertising.

For securities and real estate generally, the CRA's audit manual frames the question as whether the taxpayer is trading or investing. A short holding period alone is not conclusive and must be viewed with all the facts. A secondary intention to resell at a profit is almost always present, and if it is carried out the gain is usually business income. That guidance is for securities and real estate, so it is a helpful comparison for crypto and not a rule written for it.

No single factor settles the matter. Someone who buys once and holds for years looks very different from someone who trades daily using borrowed money.

Trades, swaps and spending

Many people think tax only arises when crypto is turned into dollars. That is not the case. Trading one crypto-asset for another is a disposition of the crypto you gave up, measured at the fair market value in Canadian dollars of what you received. Paying for goods or services with crypto is also a disposition, treated as a barter transaction.

Working out the gain or loss

If your activity is a capital gain, you subtract the ACB and the outlays and expenses of selling from the proceeds of disposition. ACB is usually the cost of the property plus the expenses to acquire it, such as commissions and legal fees. Report amounts in Canadian dollars, and report a disposition in the calendar year it occurs.

On Schedule 3, proceeds, ACB, outlays and the resulting gain or loss go in separate columns, and a positive result goes to line 12700. If you have several purchases of the same coin at different prices, the way ACB is averaged can matter. The CRA uses an average ACB for identical properties such as shares of the same class, so ask a professional how that applies to your coins.

If you have a capital loss, it can be used only against taxable capital gains. It can be carried back three years and forward indefinitely. Business losses follow different rules, so the classification affects losses as well as gains.

What to do next

• Export a full history of purchases, sales, swaps and spending from every wallet and exchange.
• Record the Canadian-dollar value of each transaction at the time it happened.
• Note how often you trade, how long you hold, and whether you borrowed to buy.
• Decide, with an accountant, whether your activity looks like investing or a business.
• File a return for the year of any disposition, even if no tax is owing.

If you have unreported past activity, get advice early on how to correct it. A tax lawyer or accountant can look at your records and explain the options.

Frequently asked questions