The State of Crypto Tax in 2024

Three years after our last bull run post, Metrics is back with another tax update. We posted two previous updates on Reddit, the 2021 Bull Run update and the Taxation 2020 post. We recommend taking a look through these if you haven’t, or if you are unfamiliar with crypto taxation in Canada.

Since then, quite a few things have changed, with Metrics, the CRA, and the state of the crypto markets. Grab some snacks and a drink, this is going to be a long one. We’re going to break it into a few sections:

• What's changed in the crypto market
• What's changed with the CRA
• What's changed at Metrics
• Updated Tax information, including what not to do, tips, tricks, and our other recommendations.

But first, we need to give our obligatory disclaimer:

We write these posts because we see a lot of mistakes made, and hope we can set you, as a Canadian crypto user and taxpayer, on the right path. If we can save even one person from making super costly errors and mistakes, then it's worth it. That being said, this is not financial advice. If you have questions about your own portfolio, you should talk directly to an accountant. Preferably a designated CPA who knows what they’re talking about in the crypto space.

The things we state on this post are our thoughts after dealing with thousands of returns, millions and millions of transactions, and many dealings with the CRA.

So, without further ado, let's jump right into it.

What's Changed in the Crypto Market (a tax practitioners view)

The biggest changes we have noticed are the following:

• Much more NFT activity
• GST application to NFT sales
• The emergence of trading on Solana
• Much more low cap activity - Low cap, tax coins, Pump.fun
• Presales
• Lending, Earning, Staking
• Bridging
• ETFs

High Level Regulatory Overview

The Canadian Securities Administrators (CSA) has taken the position that fiat-backed stablecoins (referred to as "value-referenced crypto assets") may constitute securities and/or derivatives under Canadian securities laws. Overall, the CSA's regulatory stance on stablecoins could stifle innovation, increase operational costs, and limit the competitiveness of the Canadian blockchain industry on a global scale.

At the same time, we’ve seen the SEC drop its investigation into whether Ethereum (ETH) should be classified as a security. We think this is going to have major repercussions up here in Canada, with most exchanges choosing to leave rather than comply with OSC rules. The question remains, if we push out all the exchanges, how do we protect competition and the Canadian market?

NFT Activity

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With the massive amounts of NFT activity, this presents a big challenge for tax purposes. NFTs by nature are non-fungible, meaning they are unique, and so each NFT has its own ticker or identifier. This means that if you trade one NFT for another NFT, even if they are in the same collection, this is a taxable trade. If you buy an NFT with ETH, this is a taxable trade. If you buy an NFT on ordinals with BTC, this is a taxable trade. As such, you need to record the identifier (NFT #43432) in your information so that you can calculate the cost basis of it (what you sold to buy it), so that when you sell, you can calculate the profit/loss. If you are using Ordinals, there is currently no software that can track these transactions - you must record the data yourself.

We’ve also seen people using ETH or other altcoins (non-stablecoins) to buy NFTs, resulting in massive gains because they have a low cost basis on those alts. Its always best to use stablecoins where possible when buying NFTs.

GST/HST Application to NFTs

There is also a fairly recent emergence of GST/HST in application to NFTs. The CRA has stated that if a taxpayer sells over $30,000 worth of NFTs, that they are no longer a small supplier, and must register for a GST/HST account. Unless you have direct proof that the person/entity you are selling to is not in Canada (ie an invoice, etc), there will be GST/HST applied to the sale of the NFT. So if you sell an NFT for $50,000 CAD equivalent, you must pay GST/HST (out of your profit) to the CRA. If you are selling on a marketplace like OpenSea or Tensor, you would likely not know who you are selling to - you are then responsible for paying that GST/HST out of your total proceeds of disposition.

So, your options to are to:

• a) Know your client, exempting all sales to non-canadians.
• b) Get charged a minimum of 5% on your global NFT sales.

Yes, it is brutal. You must also register for GST/HST and file annual or quarterly GST/HST returns with the CRA.

This makes trading NFTs in Canada extremely difficult, and applies regardless of business income or capital gains treatment. Our advice is to plan your activities in the lowest possible excise tax provinces, or if possible, stay away from NFT trading in Canadian entities.

Solana

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Due to its low fees and fast transaction speed, Solana has emerged as a clear winner for trading speculative plays. The emergence of pump.fun and other easy ways to launch tokens means anyone can launch a token, with minimal financial investment. This has resulted in millions of cryptocurrencies being created over the last year or two, and a definite increase in volume/activity by a lot of traders. If you’re trading a lot of these low cap meme coins, that activity will most certainly qualify as business income, most likely as an adventure or concern in the nature of trade. Speculative, short term trading and capital gains do not mesh.

Altcoin Trading and Superficial Losses

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The rise of pump.fun and its associated pump and dumps - One time quick trades of low cap coins are generally problematic. Many of these have massive supplies so that you have to buy 20 trillion tokens for 1 ETH, or 9.6M tokens for 2.6 SOL  - most tax software can not handle this properly, there are just too many zeros.

Another problem is the tax coins - where if you sell, 5% of what you sell goes to the pool, or into other users wallets. This is also not picked up. What happens here is that when you sell 30,000,000,000 tokens, the amount in other peoples wallets changes automatically, without a transaction showing so. This may happen in your wallet. Then, when you go to sell your 30,000,000,000 tokens, you will have 5,000,000 left in your wallet according to the recorded transactions. If you’re a capital gains taxed individual, you will have to effect superficial losses - This means you might have a tax balance of tokens left with a massive cost basis, but no actual tokens left. Every single software out there does not know how to pick this up. So your gain looks much larger than it really is, unless you have a professional who knows to clear those balances.

Superficial losses are a big problem for a lot of people. If you sell something for a loss, and have purchased it within 30 days prior to selling, or repurchase it within 30 days after the sale, this loss can be denied and added to the cost basis of what you have left.

For example, you might have ETH with a cost basis of $12,000 CAD because you sold for a loss and re-bought, or sold NFTs to ETH (which counts as a purchase of ETH, triggering a superficial loss). It's important to make defined, well thought out decisions when it comes to trading alts. It's important to know your dates of purchase, sale, transactions, and what you’re selling something into.

Presales

Presales have gained increased traction over the last few years, and have become more accessible to the average traders. What is important to know is that when you send ETH/SOL/USDC to an address for a presale, the transaction will appear as a withdrawal from your wallet.

From a tax perspective, deposits and withdrawals are not our main concern as they are generally not taxable - it looks like you sending between your wallets. Unless we go into each and every deposit on-chain, we have no way to know whether a withdrawal is a contribution to a presale, which we need to establish your cost basis. If you are using an aggregating service like Cointracking or Koinly, those services will not be able to determine if they were for a presale either.

So, if you are participating in presales, it is imperative that you are making a list of all of the presales you are participating in. Ensure you have a link to the transaction on-chain, with the volume of token sent and the date. It is the only way we can account for these correctly at this time. Help us help you!

In Canada, we generally treat pre-sales with delayed vesting periods as follows:

• Say you participated in the pre-sale by contributing ETH tokens to a pre-sale.
  • First, a taxable event occurs when you send your tokens to the pre-sale address/entity. A gain or loss would occur when you send the ETH.
  • The value of tokens sent to the pre-sale would now act as the cost basis for the expected pre-sale tokens. For example, if you sent 5 ETH that had a fair market value of $1,500 per token at the time you sent it, your total cost basis of the presale tokens would be $7,500.
  • 6 months go by, and you receive 1000 “randomcoin” for participating in the pre-sale. This would not be considered income. Instead, you would have a cost basis of $7.50 per “randomcoin”.
  • Holding the tokens received from the pre-sale does not create a taxable event. When you are to sell them, you would realize a gain or loss on the $7.50 ACB per “randomcoin”.

There may be certain circumstances where this treatment does not suffice. Pre-sales can get complicated and it is best you consult a CPA to ensure you are accounting for these activities appropriately.

Loans

If you borrow from someone on leverage, or use a service like Summer.fi, because you’ve locked your assets in there, you need to record that you have borrowed money, and declare it in your data. Crypto calculations often track balances of assets, and if you borrow 50,000 USDC and then sell it for alts, the computers will think you have sold something you didn't own, and create a 0 cost basis sale for that amount, resulting in large reportable gains that aren’t real.

Earning is income at the time it is earned. The same with staking. If you have deposited funds and you are allowing the exchange to use them for a fee paid to you, you must declare that as income. For example, If I earn 43 USDT in a month, that's $43 USD I must declare as income. If I earn 0.1 ETH when ETH is worth $1,750 USD, then I have earned the equivalent of $175 USD, even if I haven't sold the ETH. It's taxed regardless. We still see too many people thinking they don’t pay tax as long as they don't sell.

I would highly, highly, recommend not engaging in these types of activities unless you keep the most accurate notes.

Bridging

This has been one of the biggest tax headaches in recent years. When you move an asset from one blockchain to another through a bridge, there tends to be gaps in information. Renaming, different tickers, tracing back where they came from becomes really important. If I can make a recommendation, please try to avoid bridging assets, and interact on one chain with the assets you have there. Its so hard to track correctly for tax purposes and results in expensive accounting bills because we have to trace everything manually.

There is also an uncertainty around taxation of bridging. The ticker of the asset often changes, meaning this is effectively a different token - This may be a taxable transaction should the CRA decide so. At the moment, we are not treating it as such as we believe it looks more like a transfer.

ETFs

Since our last post, we have Canadian ETFs for BTC and ETH, and now US market ETFs for BTC and ETH. This is a massive change in the market landscape and provides greater access to the crypto markets. The US ETFs have seen hundreds of thousands of BTC purchased by investors, and have led to the rise in BTC price as of recent. The ETFs are one of the biggest combined holders of BTC.

These ETFs allow investors to buy and hold crypto assets in tax-sheltered accounts like TFSAs, RRSPs, FHSAs, etc. This can be a massive advantage as it is the first way to invest in crypto in a tax-free manner. We get questions from clients as to how they can minimize their taxes, and this is 100% the best way. The bitcoiner in me sees the irony as Wall Street investing in bitcoin, and going against what BTC stood for, but we can’t ignore the tax benefits provided by these vehicles. There is a massive tax planning opportunity if you haven’t yet used these tools to your advantage. If this is something you wish to discuss, we’re happy to help with how to use these to your advantage.

What's Changed with the CRA

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The CRA is growing their resources in respect to Crypto. The information is still basic, but in alignment with our previous guidance. Some of their more recent guidelines can be found below:

• March 6, 2023: Investing in cryptocurrency
• March 13, 2023: Mining cryptocurrency
• March 20, 2023: Valuing your cryptocurrency

The CRA has also provided a guide that helps explain the taxation of cryptocurrency. It can be found HERE. We want to ensure the community is abiding by CRA interpretations and is onside with their tax obligations. We have clients that have been audited recently, and the CRA has requested transactional data and addresses. If you haven’t reported anything to the CRA for your crypto activity we highly recommend you get on top of this as soon as possible.

Since the last post, there have been some changes we have noticed at the CRA. They are starting to get organized and look into crypto activities - they do have a crypto team. There are now specific NAICS codes for crypto activities that we have to file on T2125s and T2s. Their main concern seems to be the classification of business income versus capital gains, and so this is something we scrutinize in depth when assessing a client.

They request crypto trading data and will process it through their own system. What this system is, we don’t yet know. There have been multiple audits of cryptocurrency returns, both corporations and individuals. Sometimes its a partial review, other times a full audit. Audits seem to take 2-3 years for them to complete, with partial reviews taking a few months. I have communicated in depth with some of the crypto auditors and we tend to take the approach of full cooperation, as we have already gone through all of our files we submit in depth prior to filing. There are certain clients who are more prone to audits than others, and we generally have an idea of who those clients are. I will say that no one person/entity is safe from audit, and its important to provide all information to your accountant (or to the CRA if you’re choosing to file yourself).

Income transactions

If you have transactions where assets are entering your wallet, and you don’t have an explanation as to where they have come from, or proof of transferring from another owned wallet or source, the CRA is now trying to default state that this is income. Regardless of if its a withdrawal from an exchange, a transfer/loan from a friend, a deposit from an airdrop - if you don’t have info on where its from or other proof, the full amount will be included in income by the CRA.

This is not a policy we agree with as there are many reasons amounts might come into one’s wallet - a bridge transaction, withdrawal from exchange, a mixer (please don’t use these), an airdrop, a loan, etc. Their blanket approach is going to hurt a lot of investors who aren’t keeping perfect records. So our recommendation? RECORD. EVERYTHING.

But what if I haven’t filed my crypto taxes, am I in trouble?

The CRA has been quite generous and kind in regards to those people who are coming forward about their crypto activity that they have mistakenly not filed because they weren’t aware that what they were doing is taxable. This may change as crypto tax becomes more widely known. If you have past years of activity and haven’t yet filed it on your return either because you didn’t know or you were afraid that you’ve gone too far, you don’t have to worry. They will often waive penalties and (sometimes) interest against these returns if you come forward with them. There is a specific procedure for this, so reach out if you need help with this.

Guidance

The CRA is still choosing to remain pretty quiet about the way specific transactions should be treated, because if they declare something, they have to stick with it, so its all still at their whim at the moment. There are things that we do know for certain, like that crypto-crypto trades are taxable, staking/earning is taxable, etc, and those are things we’ve talked about in the past. What is still unclear is some of the more complicated transactions, like vaults, loans, bridging, and NFT LPs. If you’re engaging in these types of novel activities, you are opening yourself up to risk.

What's Changed at Metrics?

This is a short section just to let you know some of the changes we’ve gone through. Primarily, growth and increases in efficiency. As the crypto market has become exponentially more complicated, we’ve had to scale and improve our efforts. We have a specific team (thats more than just me) devoted to crypto tax, full time. We are a member of the Canadian Blockchain Consortium, we are in discussions with industry leaders, provincial securities commissions, and other stakeholders in the crypto industry.

We have pledged to stand with crypto - an initiative by Coinbase in Canada, and ask you all to do the same. You can CLICK HERE to pledge your support.

Tips, Tricks, and Tax Planning

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We get the question of “How can I not pay any tax” a lot more than one might think. The answer is, you can’t. If you live in Canada.

Offshore

This is not really a viable solution to paying less tax. Why? Because if you live in Canada, you are taxed on your worldwide income. So regardless of where you are making money, if you bring that money in to be used personally, you will pay tax on it. There is no magic secret that you’ve discovered.

Leaving Canada

This is the only way you can pay less tax to the CRA. You would have to cut all ties to Canada (if you’re married or common law, your spouse must come with you), and move out of the country, and establish residency for tax in another country. This is a lot more complicated than many people think. There are havens, such as El Salvador, Portugal, etc. The thing that stops many people is the departure tax. At the time you cease to be a resident, you are deemed to dispose of all of your assets - including crypto - at fair market value. So if you have 10 BTC you bought for $1000 each in 2016 and have been holding them until now, you would have a massive gain you would have to pay taxes on when you leave Canada. Any gains/profits you make while in Canada, even if you don’t realize them, are taxable before you move out of the country.

Borrowing

If you are ok with using Defi protocols, or using centralized loan services, this is a way you can defer taxes. You would have to deposit your assets into the protocol, and borrow USDC/USDT against them. You can then sell this stablecoin to CAD and realize no profit, and use these funds as you wish. In the end, you will either have to repay the loan, or sell some assets to pay back the loan. If you sold some of your collateral, or get liquidated, this is a taxable event at that time. So if you put 1 BTC into a loan protocol at $65,000 USD/BTC, and borrowed $30,000 USDT from it, sold that to $40,000 CAD, this is not taxable (you would have a small gain/loss on the USD/CAD conversion). But then say BTC drops to $40,000 each, and you get liquidated, you are deemed to have sold your BTC at the liquidation price for CAD.

Fund lost on exchanges

In the last bull market, we saw the demise of crypto entities like FTX, Celsius, BlockFi, 3AC. Many have been affected by this, and it is imperative that if you lost fiat or crypto on an exchange that you account for the losses appropriately. If you have access to the balances of what you held on the exchange, ensure you keep that documentation safe.

These entities are going through the bankruptcy process, and it sounds like customers will eventually receive some of their funds back. This plays a roll in what can be claimed as a loss and varies on a case by case basis.

Incorporation and Other Tax Strategies

We get asked a ton about whether incorporating a business to hold your crypto assets makes sense or not. For the average crypto investor, incorporating does not make sense in Canada. Investment income in a corporation is taxed at a high rate and mitigates the tax advantages clients often think they can obtain by incorporating.

The only type of trader this applies to is a high volume trader who trades nearly full time. The reason being is that your assets must qualify as income, and be held as inventory for trading.

There are many factors in determining whether incorporating is a smart strategy, and we recommend speaking to a CPA before making any decisions.

Many of our clients engage us to perform “mid year calculations”. This gives us an opportunity to assess how a client’s portfolio is performing for the first half of the year; doing so allows us to provide guidance on whether or not it is beneficial to realize additional gains or income in the year, whether there are defunct tokens that should be sent to burn addresses, etc. This is the biggest opportunity for forward tax-planning, because it allows us to see where you’re at before the year ends.

Short Term vs. Long Term

This is an American thing. In Canada, there is no such thing as “long term capital gains”. There is no specific designation between how long you hold something and the tax rate applied. The only designation is business income or capital gains, as referenced previously.

Keeping Records (best practices)

If you can keep a trade journal, this is the number one thing you can do to reduce costs. Making a note of the transactions you made. For example:

2024-06-24: Sold 3 ETH for 0.15 BTC, inscribed 3 ordinals RANDOM.ORDINAL.MINT on XXXXX address.
2024-06-28: traded 33.2 SOL for 3,000.55 WIF on XXXXX address.

This will allow us, and you, to recall what you did a year later to trace down any missing sources or data without having to sleuth through the chain to find out what happened.

In summary

There have been a number of changes in the tax landscape for crypto, with the CRA getting more and more involved. Now is the time to organize your crypto taxes and get organized while there is still leniency. Crypto is becoming more and more mainstream, with presidential candidates incorporating it into their policies in the USA. In Canada, there are working groups and professional groups advocating for the advancement of crypto and crypto policies from government.

At Metrics, we think the sky is the limit for crypto, and we’ll be here to support the industry, and our clients, for many years to come. It can only get better.

If you have questions, please reach out via hello@getmetrics.ca. You can also book a call if you would like to discuss our services and see if we are a good fit for your situation.

Kyle & Rajin
Metrics CPA

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