There is a broad misconception that Crypto tax rules in Canada are a gray area of law. This is not true. In fact, Canada, which pioneered the expansion of digital assets post- Bitcoin with the creation of Ethereum and other seminal cryptocurrencies, was at one time a leader in Crypto regulation. This put Canada ahead of most countries in terms of having an established framework for the three pillars of Crypto law, which are: securities law, anti-money laundering law, and of course, tax.
Rather than creating a new subclass of assets, the tax authority in Canada, the Canada Revenue Agency, analogized digital assets to existing assets and based its enforcement and interpretation accordingly. As a result, Canadian taxation of digital assets has been reasonably well settled far longer than in other countries. As such, we know that certain activities will expose investors in digital assets to tax liability and there are certain ways to mitigate that liability. Here are a few things to consider when structuring for tax efficiency of digital asset investments:
1) Consider whether your digital assets are capital property or not. Typically, if you bought and held for a long period of time it will likely be treated as capital, which is taxed preferentially; however, if you have been engaging in a large volume of trades or swaps between digital assets, you may lose the capital gains treatment of your assets as well as the preferential tax treatment.
2) Swapping between digital assets, including stable coins, can trigger tax consequences if there was a gain in the asset you are swapping. Please reference this article [Crypto Tax Basics: Capital gains on stable coins? – Grinhaus Law Firm] for more information on how this works, but keep this in mind when you are creating your bookkeeping in anticipation of tax time.
3) Make sure your bookkeeping is up to date and in order, and is being kept track on an independent spreadsheet or accounting program rather than relying on downloading statements from an exchange. Remember that gains and losses can be carried backward and forward for tax reasons, and establishing the Acquired Cost Base, or ACB (ie what you bought the digital assets for) is important to ensure that if and when you do cash out, you are only paying tax on the gains and not the full amounts. In order to be able to do this, you have to be able to substantiate the ACB, otherwise you may have to pay tax on the full amount.
4) Using a corporation or family trust is NOT always beneficial for private investors from a tax perspective. In fact, depending on your circumstances, could be very detrimental and attract substantial tax consequences. Some people could greatly benefit from minimizing how they structure their holdings, while others who may be concerned with personal liability could benefit with domestic or offshore structures and entities. The devil is in the details!
For a full high-level overview of digital asset tax structuring in Canada, please consider subscribing for the CrypTax Podcast at CrypTaxPodcast.ca, which is a course outlining the fundamental principles of digital asset tax structuring and planning in Canada.
Please Note: This article is not intended to be legal advice and should not be relied upon as such. It is important that you consult with a licensed professional before engaging in any tax or other structuring activities.
