Reporting income from crypto-asset transactions
Dispositions are one of the transactions or events related to crypto-assets that often has tax implications. As a crypto-asset user, you must report business income (or losses) or capital gains (or losses) from dispositions.
Crypto-asset dispositions
A disposition of a crypto-asset may occur when you do any of the following:
- Trade or exchange it for government-issued currency or another type of crypto-asset
- Use it to buy goods or services
- Transfer ownership of it by way of gift or donation
The list above does not include all situations that result in a disposition. Other situations may also result in a disposition and may potentially have income tax implications.
Using cryptocurrency to pay for goods and services is a common example of the disposition of a crypto-asset. Since cryptocurrency is not government-issued currency, using cryptocurrency as payment for goods or services is treated as a barter transaction for income tax purposes.
Generally, you are considered to have disposed of cryptocurrency if you use it to pay for goods or services from a vendor. On the other hand, the vendor must include in their income the value of the goods or services provided or the value of the cryptocurrency accepted as payment, whichever is more readily valued.
What is a barter transaction
A barter transaction occurs when two parties exchange goods or services and carry out that exchange without using government-issued currency.
For more information, see our archived content on barter transactions.
Some transactions do not result in a taxable disposition, such as transfer of crypto-assets between wallets that you own.
Business income or capital gain
When you dispose of a crypto-asset, the gain (or loss) may be considered business income (or loss) or a capital gain (or loss).
Business income (or loss)
Generally, if a crypto-asset transaction is made on account of carrying on a business you have realized business income.
You have realized business income if:
- the disposition of a crypto-asset is on account of carrying on a business, and
- the proceeds of disposition (usually the sale price of the crypto-asset) are more than your cost (usually the cost of a crypto-asset, plus expenses to acquire it) and the outlays and expenses incurred to make the disposition
You have realized a business loss if the amount for the proceeds of disposition of the crypto-asset is less than the cost and the outlays and expenses incurred to make the disposition.
Carrying on a business
Paragraphs 9 to 13 of Interpretation Bulletin IT-479R, Transactions In Securities, provide general information to help you determine if your securities transactions are made on account of business income or capital.
The information in these paragraphs may be relevant in determining whether your crypto-asset transactions are on account of income or capital depending on the nature of those assets. However, you should keep in mind that this does not mean that crypto-assets are necessarily securities (for example, shares and bonds) for income tax purposes.
As introduced by Interpretation Bulletin IT-479R, you are generally considered to be carrying on a business if your course of conduct indicates that you are disposing of crypto-assets in a way capable of producing gains, with that object in view, and the transactions are carried out in a manner similar to a trader or dealer in securities.
The following factors may indicate that you are carrying on a business:
- Frequency of transactions – You have a history of extensive buying and selling of crypto-assets
- Period of ownership – You hold your crypto-assets for a short period of time, and you turn them over quickly
- Knowledge of crypto-asset markets – You have knowledge of, or experience in, crypto-asset markets
- Time spent – You spend a substantial part of your time studying crypto-asset markets
- Financing – You finance your crypto-asset purchases by some form of debt
- Advertising – You advertise that you are willing to buy crypto-assets
Whether you are carrying on a business or not must be determined on a case-by-case basis and consider all the factors of your transaction. However, an isolated crypto-asset transaction could be determined to be on account of business income when it is considered an adventure or concern in the nature of trade.
What is an adventure or concern in the nature of trade
An adventure or concern in the nature of trade generally refers to non-habitual activities that are quite separate and apart from someone’s ordinary occupation and are carried out to make a profit, like buying and selling goods or property.
There is no single criterion to determine whether an activity is an adventure or concern in the nature of trade – all circumstances of the activities must be considered to make a determination.
For the complete and most technical information along with examples on an adventure or concern in the nature of trade, refer to: Adventure or Concern in the Nature of Trade.
Example – Business income or loss
You regularly buy and sell various types of crypto-assets.
You pay close attention to the fluctuations in the value of crypto-assets and intend to profit from the fluctuations.
Your activities are consistent with someone who is engaged in the business of day trading.
In 2022, you sold $240,000 worth of various crypto-assets, which you originally bought for $200,000.
Your profit is $40,000.
Since you are carrying on a business of trading crypto-assets, you have to include the profit of $40,000 as net business income on your 2022 income tax and benefit return.
Capital gain (or loss)
Generally, if a crypto-asset transaction is not made on account of business income, it would be considered capital in nature.
You have realized a capital gain if:
- the disposition of a crypto-asset is on account of capital, and
- the proceeds of disposition (usually the sale price of the crypto-asset) are more than your adjusted cost base (usually the cost of a crypto-asset, plus expenses to acquire it) and the outlays and expenses incurred to make the disposition
You have realized a capital loss if the amount for the proceeds of disposition of the crypto-asset is less than the adjusted cost base and the outlays and expenses incurred to make the disposition.
Example – Capital gain or loss from selling
You bought crypto-assets in 2015 for $3,500 in Canadian dollars with the intention of holding it to let it appreciate in value over a long period of time.
In 2022, you decided to sell the same cryptocurrency for $4,000 in Canadian dollars.
You had no other crypto-asset transactions between 2015 and 2022.
You have a capital gain of $500 on the disposition of the cryptocurrency.
You have to include a taxable capital gain of $250 on your 2022 income tax and benefit return.
Example – Capital gain or loss from trading one crypto-asset for another
On July 30, 2022, you bought 100 units of cryptocurrency E, for a total value of $20,600.
To pay for this purchase, you used 2.5061 units of cryptocurrency B, which were trading at $8,220 per unit on that day for a total value of $20,600. You originally bought the units of cryptocurrency B for $15,000.
In effect, you have disposed of 2.5061 units of cryptocurrency B in exchange for 100 units of cryptocurrency E at a value of $20,600.
Assuming you intended to hold cryptocurrency B as long-term investments, your disposition of cryptocurrency B on July 30, 2022, would result in a capital gain.
It is calculated as follows:
$5,600 capital gain taxed at 50% = $2,800 taxable capital gain
If, on the other hand, the original purchase price of the 2.5061 units of cryptocurrency B had been $25,000 (that is, more than their fair market value on July 30, 2022), you would have a capital loss.
It is calculated as follows:
$4,400 capital loss × 50% = $2,200 allowable capital loss
Reporting business income (or loss)
If you have disposed of a crypto-asset on account of business income, you must report the full amount of your profits (or loss) from the disposition in your tax return.
For more information on business income, including from the disposition of a crypto-assets, refer to: Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.
Reporting capital gain (or loss)
If you have disposed of a crypto-asset on account of capital, you must include half of your capital gains (known as taxable capital gains) in your income for the year.
For more information on proceeds of disposition, adjusted cost base, and capital gains and losses, including from the disposition of a crypto-asset, refer to: Guide T4037, Capital Gains.
Allowable deductions
You are allowed to deduct half of your capital losses (known as allowable capital losses), but only against your taxable capital gain.
As such, you cannot deduct your allowable capital losses against income from other sources, like employment income.
Generally, if your allowable capital losses are more than your taxable capital gains in a year, the difference is added to your net capital losses, which can be applied against taxable capital gains of other years.
To offset taxable capital gains, you can carry back three years or carry forward indefinitely any net capital losses.