Updated: Dec 25, 2022
Crypto prices have dropped even further below its resistance point of USD $30k and now even below $20k. For those who have invested in crypto and thinking of potentially selling at a loss due to various reasons, make sure to read this post to better understand what your tax implications may be.
If you had invested for the long term and will be riding out the volatility, than this post may not be as applicable to you. That being said, if you are hoping you might get a tax break from incurring losses, let me show you how the tax system works.
Today, I will be covering the tax implications form crypto losses, walk you through an example of how you might calculate your tax impact, and then bring it all together as to how you might make your decision to sell your crypto holdings.
Capital vs Business Property
According to the CRA, there are two main classifications of your crypto holdings: capital property or business property. The tax treatment is also very different for the two.
To get some terminology out of the way for capital property - when you sell crypto, you can have a capital gain or capital loss. A capital gain is when the value of your crypto increases and you sell for more than what you originally paid for. A capital loss is when the value of crypto decreases and you sell for below what you originally sold for.
When it comes to capital property, any dispositions such as sale of your crypto results in a tax event, which you would need to report on your tax return. If you have made capital gains, then only 50% of it is included in income.
On the other hand, if you made capital losses, you also only report 50% of the losses on your tax return. Another caveat to capital losses is that it can only offset other capital gains.
For example, if you had capital gains on other investments such as rental properties or stocks, you can offset it with capital losses from your crypto. You will NOT be able to offset it with other income sources such as business income or employment income.
So if you do NOT have capital gains to offset your capital losses with, you would simply need to carry forward to future tax years.
Now, if your crypto is considered business property, this will provide a totally different tax implication. If you made profits from disposition of crypto, that would be included in your income at 100%, instead of the 50% if considered capital gains. However, if you have losses from disposition of crypto, then those losses are also included at 100% and can be used to offset any other sources of income, such as your business income or employment income.
Also keep in mind that "dispositions" result in a tax event. I say dispositions, since it's not only sale of your crypto that creates a capital gain or loss or business income or loss. Any of the following transactions will as well, such as when you:
Let me illustrate the impact this can make on your tax return. Let's say you had around $10k in losses from disposing of your crypto, such that you initially bought for $25k but now its worth $15k. You also have $70k in taxable income from your business or employment income, and are in the 28.2% marginal tax rate (combined federal and BC tax rate).
If crypto was considered a capital property, that the $10k in capital losses cannot be used to offset your $70k in business or employment income. If you had no other capital gains in the year, that $10k simply gets carried forward to a future year where you can apply it. At the end of the day, your taxable income is $70k and your tax liability is around $16.4k.
However, if your crypto is considered business property, then resulting business losses can be used to offset your business or employment income. So your $70k in income is reduce by the $10k in losses, resulting in taxable income of $60k. The tax liability is now around $13.4k, which means you saved $3k in taxes or you may even get a refund for it.
Now, classification of your crypto holdings as capital or business property cannot be chosen at will. It depends on your intentions and the level of activity involved in the day to day management of the crypto.
There is no black and white rule to determine what your intentions are of course, and each situation is based on the facts of the circumstances. Since there are no specific crypto related tax laws or court cases in place, we can refer to transactions in securities (IT-479) to provide general information to help you figure out if transactions are income or capital gains. Some factors are to determine if you are carrying on a business are:
(a) frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,
(b) period of ownership - securities are usually owned only for a short period of time,
(c) knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,
(d) security transactions form a part of a taxpayer's ordinary business,
(e) time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases,
(f) financing - security purchases are financed primarily on margin or by some other form of debt,
(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.
Based on how the facts support each of the mentioned factors, there may be a case for your crypto being capital or business property. Make sure to go to a tax professional to properly determine your tax position.
Inventory vs. Adventure or Concern in the Nature or Trade
Let's take it one step further and say that you have considered crypto as business property. There are two classifications under business property: inventory and adventure or concern in the nature of trade (i know that last one is a mouth full). I won't into too much detail since this can get quite complicated.
But in a nutshell, if it's clear that you are in the business of crypto, such in the business of trading or mining crypto, you can classify your crypto as inventory. This would mean at year-end, you can value your inventory at lower of cost or fair market value. This would mean that if the value of your crypto dropped at end of the year, you can take a premature deduction against your business without disposing of your crypto.
However, if trading or mining crypto is not your main business, but you have some characteristics of a business, your crypto may be held in the adventure or concern in the nature of trade.
I would say this classification is sort of a middle ground between an investment and carrying on a business. An example that the CRA uses is that of a dentist who flips real estate on the side. While buying a real estate property for renting may be considered an investment, thus capital property, if you are actively renovating homes and trying to sell it for a profit a few months later, the CRA may view this as a business.
However, considering it's quite separate and different from your ordinary job (ie. dentist), it fits in a different category called adventure or concern in the nature of trade. In this cateogry, you cannot take a premature deduction like inventory if the value of the crypto falls at year-end, any dispositions resulting in a loss can be used to offset your business or employment income.
Let's Bring It All Together
But if we are to bring it all together, if you have capital losses, you are not able to take a deduction against any of your business or employment income, so disposing of your crypto won't really effect your tax position. Of course, if you need the liquidity (ie. cash) or you don't believe in crypto anymore, then the tax implications might not matter to you.
If you have business losses, you are able to offset it against other income sources, which may lower your tax liability or even get a refund. This may be an area of tax planning. You can simply dispose of crypto for CAD dollar, or you can exchange it for another crypto to trigger a disposition and get tax deduction.
Disclaimer: Note this post is not financial nor accounting/tax advice and should be used for entertainment purposes only. Consult with your own financial advisor, accountant and/or tax advisor for specific advice related to your business situation and needs.