How to invest tax-free in a bitcoin ETF in Canada
You can’t hold crypto in a registered account, but you can hold crypto ETFs. Just keep these pros and cons in mind.
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You can’t hold crypto in a registered account, but you can hold crypto ETFs. Just keep these pros and cons in mind.
Canada is one of the best places on Earth to invest in crypto. The regulatory environment here is crypto-positive, and Canada is on the cutting edge of crypto innovation—we were the first country to launch a crypto exchange-traded fund (ETF).
Another perk of crypto investing in Canada: you can combine it with tax-advantaged registered accounts like the tax-free savings account (TFSA) and the registered retirement savings plan (RRSP). Using these registered accounts, you can build a tax-free or tax-sheltered crypto portfolio, respectively. What’s more, you don’t have to know your way around “crypto land”—such as crypto wallets and crypto exchanges—to do this. But you should understand how crypto gains are typically taxed in Canada, how crypto ETFs work and the overall risks of crypto trading. As with any speculative asset class, investing in crypto is inherently risky. You will encounter market swings and crashes that can test even the most experienced investors. Here’s what to keep in mind.
In Canada—as of June 25, 2024—the inclusion rate for individuals for capital gains up to $250,000 is 50%, and for any portion of capital gains exceeding $250,000, it’s two-thirds (66.67%). Capital gains will be taxed at your marginal tax rate.
For example, if you bought some bitcoin or a stock for $100 and sold it for $110 a year later, $5 of your gains would be taxed. If your marginal tax rate is 20%, you’ll owe $1 in tax. However, holding investments in registered accounts in Canada—such as the TFSA and RRSP—can help you avoid capital gains tax in two ways:
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Aside from a TFSA, another powerful tax-advantage account is an RRSP. Check out the best RRSPs in Canada.
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Can you hold bitcoin and other cryptocurrencies directly in a registered account in Canada? No. But you can hold crypto ETFs in these accounts, just like you do stocks, mutual funds or other ETFs.
In February 2021, Canada became the first country to launch a spot bitcoin ETF. (Bitcoin ETFs launched much later in the U.S., in January 2024.) “Spot” means the ETF holds actual bitcoin and not bitcoin derivatives—complex financial instruments such as futures and options that gain their value from bitcoin or crypto. Today, there are a dozen Canadian crypto ETFs on the market, including bitcoin ETFs, ethereum ETFs and multi-crypto ETFs. One ETF provider—Fidelity Investments—is sprinkling crypto into its all-in-one ETFs.
Canadian investors are uniquely positioned to benefit from the mainstreaming of bitcoin (BTC), ether (ETH) and other cryptocurrencies. If you hold crypto ETFs in a TFSA, you can cash out your crypto without paying taxes in Canada. If the ETFs are in your RRSP, not only do you get a tax deduction for contributing to the account, but your investments also grow tax-sheltered. Note, however, that if your investments held in a registered account lose money, you can’t claim a capital loss. (Read more about crypto and taxes.)
Let’s compare the hypothetical after-tax gains on a bitcoin investment held for two years, from September 2022 to August 2024. The table below illustrates the advantage of tax-free gains, so we’ll assume the same purchase and sale price for BTC and a BTC ETF—although, in reality, an ETF may not track BTC perfectly.
For the sake of simplicity, we’ve taken the ETF buy and sell prices to be the same as those of BTC itself—the approximate price of bitcoin in U.S. dollars in September 2022 and August 2024—even though the price of each ETF share is different from the price of bitcoin itself. We’ve assumed a marginal tax rate of 20%.
Investment | Investment account | Purchase price | Sale price | Gain | Capital gains tax | After-tax gains |
---|---|---|---|---|---|---|
Bitcoin | Non-registered | $23,500 | $61,000 | $37,500 | $3,750 | $33,750 |
Bitcoin ETF | TFSA | $23,500 | $61,000 | $37,500 | $0 | $37,500 |
As you can see, in this hypothetical situation, gains for the tax-free bitcoin ETF come out ahead by $3,750, which is about 11% more than the after-tax gain on bitcoin.
The table below lists all the crypto spot ETFs based in Canada. You can buy bitcoin ETFs (ETFs that invest entirely in BTC), ethereum or ether ETFs (those that invest entirely in ETH) or multi-crypto ETFs (those that invest in BTC and ETH). As of now, BTC and ETH are the only cryptocurrencies available through ETFs. (Figures are current as of Aug. 30, 2024.)
ETF | Ticker symbol | Management expense ratio (MER) | Assets under management (in Canadian dollars) |
---|---|---|---|
Bitcoin ETFs | |||
Purpose Bitcoin ETF | BTCC / BTCC.B | 1.5% | $2.1 billion |
CI Galaxy Bitcoin ETF | BTCX.B | 0.77% | $724.7 million |
Fidelity Advantage Bitcoin ETF | FBTC | 0.69% | $491.6 million |
3iQ Coinshares Bitcoin ETF | BTCQ | 1.75% | $283 million |
Evolve Bitcoin ETF | EBIT | 0.75% | $165.5 million |
Ethereum (ether) ETFs | |||
Purpose Ether ETF | ETHH / ETHH.B | 1.47%–1.49% | $318.7 million |
CI Galaxy Ethereum ETF | ETHX.B | 0.77% | $385 million |
Evolve Ether ETF | ETHR | 0.75% | $55.2 million |
3iQ Ether Staking ETF | ETHQ | 1.97% | $65.8 million |
Fidelity Advantage Ether ETF | FETH | 0.95% | $18.7 million |
Multiple cryptocurrency ETFs | |||
Evolve Cryptocurrencies ETF | ETC | 0.85% | $35.4 million |
CI Galaxy Multi-Crypto ETF | CMCX.B | 1.03% | $3.7 million |
U.S.-based bitcoin ETFs have created quite a buzz in 2024. The Securities and Exchange Commission (SEC) approved the first one in January, almost three years after Purpose Investments launched Canada’s first spot bitcoin ETF.
Numerous American ETF providers now offer bitcoin ETFs, including big investment brands like BlackRock’s iShares, Fidelity and Invesco. Canadian investors can buy these ETFs, too, through their discount brokerage account—just like they would any U.S. stock or ETF. And, yes, these ETFs can be held in registered accounts like the TFSA or RRSP.
Truth be told, there’s not much difference between the two. For instance, bitcoin ETFs in both countries hold the same underlying asset: bitcoin. Investors could make a decision based on their preferred parameters.
For example, you may pick the bitcoin ETF with the lowest management expense ratio (MER) or the highest assets under management (AUM), or you could look for the oldest fund—regardless of where it’s based.
If you go with a Canadian ETF, you could have more choices to make: Do you want a Canadian ETF that hedges its currency risk or one that doesn’t? Do you want to hold the ETF in U.S. dollars? The table below lays out the options for one example, the Purpose Bitcoin ETF. (Figures are current as of Sept. 13, 2024.)
ETF (ticker symbol) | Currency | Currency hedge | One-year return |
---|---|---|---|
BTCC | Canadian dollar | Yes | 117.94% |
BTCC.B | Canadian dollar | No | 121.15% |
BTCC.U | U.S. dollar | No | 120.88% |
In the right-hand column, you’ll notice there’s a difference in the ETFs’ one-year historical return, even though they all hold bitcoin as their underlying asset. This difference is because of the appreciation or depreciation of the currency in which the ETF holds its bitcoin. In this case, the non-hedged ETF delivered higher returns because it benefited from the appreciation of the U.S. dollar against the Canadian dollar. But there’s no way to have known this one year ago. Like all financial markets, the currency market is largely unpredictable.
There are advantages and disadvantages to investing indirectly through an ETF. Listed below are the pros and cons that could help you decide if this option works best for you.
The Canadian Investor Protection Fund (CIPF), which is overseen by the Canadian Securities Administrators (CSA), provides limited protection for property held by a member firm on behalf of an eligible client, if the member firm becomes insolvent. CIPF member firms are members of the Canadian Investment Regulatory Organization (CIRO) that are investment dealers and/or mutual fund dealers.
If a CIRO member becomes insolvent, the CIPF’s role is to ensure that the ETF units or shares held by the CIRO member firm are returned to eligible clients. If assets are missing, the CIPF provides coverage within the following limits:
The CIPF doesn’t cover crypto assets directly, but it does cover crypto ETFs, provided that the ETFs are held by a member firm on behalf of an eligible client. “Investing in an ETF gives an investor ‘units’ or ‘shares’ in the fund,” explains Liz Jordan, the CIPF’s manager of policy and communications. “If the member firm holding ETF units or shares becomes insolvent, CIPF’s role is to ensure that the ETF units or shares being held by the CIRO member firm are returned to eligible clients, within certain limits. However, CIPF does not guarantee or protect the value of the ETF investment.”
Bitcoin and ether ETFs have opened up the crypto investment space to everyday Canadian investors like you and me. This is an exciting opportunity, but tread cautiously. Crypto is a highly volatile asset class. Invest with a long-term time horizon, be prepared to ride the highs and lows of the crypto market, and invest only as much as you can afford to lose.
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