Once championed by “fringe” minds who dreamed of a decentralized economy, Bitcoin is becoming increasingly democratized. Although it has been around for about 15 years, it was in 2020 and 2021 that its price and hype really hit the roof.

For nearly 2 years, it’s been a tidal wave of new cryptos being born and new speculative investors trying to claim their piece of the pie. But money means taxes.

What is capital gain?

Every investor asks himself these 2 questions: sell or hodl.

As soon as there is a sale, you realize a capital gain (if you made a profit) or a capital loss (if you suffered a loss).

Example : Michael has bought 10 ETH in March 2021 which he still holds. He wants to know if he will have to calculate a tax in his next return.

*Warning*: If you are a day trader, you may need to include all your earnings. It is important to check with your accountant about this.

How to figure out the capital gain?

Unlike your other earnings (employment, rental, business…), only half of the capital gain is subject to tax. In other words, if you made a $10,000 profit, you only pay tax on $5,000.

Example : While checking the transaction history, Mickael acquired his ETH for $2,300 each and they are worth $4,300 today (date of writing this article). So first of all he needs to know, what is the profit made on all his 10ETH if he decides to sell today :

• Value of the day: $4,300 x 10ETH = $43,000
• Price of acquisition: $2,300 x 10ETH = $23,000
• Capital gain: $43,000 – $23,000 = $20,000
• Taxable capital gain subject to tax: $20,000 x ½ = $10,000

*Warning*: If you are a day trader, you may need to include all your earnings. It is important to check with your accountant about this.

At what rate does the capital gain get taxed?

Like employment, rental or business income, capital gains are subject to the same rate at which you would be taxed on all your income. The only difference, as mentioned above, is that only half of the capital gain is subject to tax.

Mickael’s Example (part 2) 

Apart from the profits generated by cryptos, Mickael has an estimated employment income of $50,000. He wants to know how much tax he will pay by selling his 10 ETH.

• On $50,000 of salary made up income: $9,964 tax
• On $60,000 of salary and taxable capital gain: $13,676 tax
• The $20,000 profit will cost Mickael $3,712 (13676 – 9964), accordingly

*Warning*: If you are a day trader, you may need to include all your earnings. It is important to check with your accountant about this.

A few tips

1. Calculating the capital gain can turn into a time-consuming exercise (hours of work) if you have been active during the year. That’s why we strongly recommend using an application that does the calculation for you by linking all your portfolios in one spot. Koinly was our favorite.
2. Ask your accountant to do the following exercise to determine which costing method is most advantageous to you: average cost or FIFO (first in first out).
3. If you have traded in a currency other than the Canadian dollar, your accountant should also be able to select the calculation of the exchange rate that is most advantageous to you: the rate on the transaction date or the average annual rate.
4. If the cost of the cryptos you are holding has exceeded $100,000CAD at any time during the year, you must complete the T1135 form or you will be subject to a $2,500 penalty.

Any questions? Our accountants can help you with any questions related to cryptocurrencies and NFT.