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Crypto profits aren’t always tax-free. Here’s how the CRA taxes cryptocurrency transactions, mining and staking, and overseas gains.
A friend at the gym was asking me if his crypto winnings from investments in Europe were taxable in Canada. It was a large once in a lifetime amount and was not his main source of income. He just tried for a few months and opt out afterwards. Lucky person.
This made me curious because what he did was very speculative, if not gambling, which is tax-free.
—Michel
Lottery or gambling winnings are generally tax-free in Canada. I think given the fact your gym buddy referred to winnings from “investments,” Michel, it was likely more of an investment gamble that just happened to pay off.
Gambling activities can be taxable in some instances. According to the Canada Revenue Agency (CRA):
“This will be the case if the gambling activities constitute a source of income (that is, carrying on the business of gambling). Determining the commerciality of gambling can be challenging. Games of pure chance, like lotteries, lack the badges of trade to which the traditional tests of business activity can be applied.”
Assuming your friend took a risk and earned a profit on his cryptocurrency investments overseas, Michel, we can look to CRA guidance for the tax implications.
Deadlines, tax tips and more
First off, Canadian residents are taxable on their worldwide income. So, just because the income was in another country or was not brought back to Canada, that does not make it tax-free.
Canadian residents must report their income from all sources in Canadian dollars. If tax is payable in another country, that tax is generally eligible to claim on your Canadian tax return as a foreign tax credit to avoid double taxation.
When you buy and sell an asset outside of a tax-sheltered account, there are generally tax implications, Michel. The disposition of a crypto asset may trigger tax in cases that taxpayers might not otherwise realize. This includes situations like:
Using crypto to buy something might not seem like a taxable event, but since it is not government-issued currency, the CRA treats it as a barter transaction that results in a sale.
When you sell an asset for a profit, you ideally want it to be considered a capital gain. A capital gain is only 50% taxable, so the tax is usually no more than about 25% of the profit depending on your income and province or territory of residence.
If you transact crypto frequently, you may have to report the income and losses as business income or business losses. Frequency is just one of the factors. Here are some others, according to the CRA:
When miners use computers to process crypto transactions, this is called proof-of-work mining. When they add a new block, they generally earn new coins from the network and the transaction fees in that block.
With proof-of-stake activities, you stake your crypto as a kind of deposit so that you can help validate other transactions. If you do this through an exchange, you generally earn a reward in the same cryptocurrency that you staked.
Both crypto-asset mining and staking activities tend to be taxable as business income.
Did your friend really win crypto in Europe, Michel, or did they take a gamble that has tax implications? It depends on the circumstances.
But, I suspect they probably have to pay capital gains tax at the very least on their profits, and possibly report the windfall as business income depending on the facts around their crypto activities.
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