Traditionally, in order to invest in cryptocurrencies (such as Bitcoin or Ethereum) you have had to purchase them through a cryptocurrency exchange platform. The purchased cryptocurrencies would then be held in either the exchange platform’s digital wallet or in an external digital wallet.
Due to the limited tax guidance and rules surrounding cryptocurrencies, it is often unclear whether a gain in value on the sale of cryptocurrencies would be considered business income or a capital gain for tax purposes. The capital gain classification is preferable, as a capital gain is taxed at 50% less than business income, but the determination is highly dependent on the specific facts surrounding the transaction and the circumstances of the taxpayer.
In addition, depending on where the digital wallet is located, there may also be T1135 foreign reporting requirements. Determining the location of the wallet can also be tricky—especially for exchange, online, and web wallets.
Fortunately, Canada’s security regulator recently approved the trading of cryptocurrency Exchange Traded Funds (“ETFs”) on the Toronto Stock Exchange. These ETFs will generally invest your money in a specific cryptocurrency and, because the ETF is available on the traditional stock exchange, you can access the cryptocurrency through your regular brokerage account.
Unlike investing in cryptocurrencies directly, the gain in value on the sale of cryptocurrency ETFs should generally be considered a capital gain and taxed at the lower rate. And since these are Canadian ETFs, there should be no T1135 foreign reporting required.
Another benefit of investing in cryptocurrency ETFs instead of using a direct cryptocurrency exchange platform, is that ETFs are eligible to be held in a registered account such as a Tax-Free Saving Account (TFSA) or a Registered Retirement Savings Plan (RRSP). Any gain on cryptocurrency ETFs held in a TFSA account will generally be tax-free, even when the funds are withdrawn from the TFSA account. And any gains on cryptocurrency EFTs held in a RRSP should be taxed at a lower rate on withdrawal at retirement.
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