As we're finishing 2020, some of you may already be thinking about the taxes that you'll need to pay on your gains come next year. Having said that, here's a quick post on how your crypto gains may be calculated in Canada. I do want to say though that I'm by no means a professional tax expert in Canada and that all of what I'm writing is what I've learned from other people, or personal experiences over the past years. Please don't fully trust what I have to say and seek a tax expert or an accountant if you have specific questions.
With regards to crypto, they would either be taxed as capital gains or business income. Which one exactly depends on several factors:
- How often you trade
- How long you hold the coins for
- How much time you spend on trading and researching
- How substantial the income is
Now this matters as it can make a difference in just how much you should pay in taxes as the calculations are done differently. With capital gains, only 50% of your profits are taxed at your marginal tax rate. On the flip side with business income though, 100% of it is taxed at your marginal tax rate. However, you can deduct expenses incurred to produce that income. So for example, you can deduct rent, electricity, and depreciation off from that income if it was used to produce that income.
Here's an example of both scenarios with a 30% marginal tax rate. The first box is with capital gains, while the second box is with business income.
When comparing the two, you can see that you pay less taxes when it's considered capital gains compared to business income. This is because only 50% of the profits are taxed if it's deemed capital gains.
After comparing the two, this may make you rethink how you should go about with crypto, i.e., HODL or trade it.
Here's a 7 minute video where I explain the differences in greater detail.
If you're Canadian, I hope that this post here has helped you out better determine your crypto tax situation.
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