Capital Gains when Trading Bitcoins and other Cryptocurrencies

The Canada Revenue Agency treats the taxation of Bitcoin and other cryptocurrency trading in a similar fashion to trading commodities or foreign currency.  When trading Bitcoin/cryptocurrencies on capital account, your adjusted cost base must be tracked in order to calculate capital gains and losses.

This article will looks at the case for Canadians where trading is considered to be on capital account, rather than income account.  The rules for determining whether trading is on capital account or income account are somewhat subjective.  Some of the considerations the Canada Revenue Agency may use to determine that trading is on income account include the following:

  • When the trading is characteristic of a professional trader
  • Frequent trading or short holding periods
  • Extensive knowledge and time spent researching the markets

Just like when buying and selling foreign currency, your ACB needs to be tallied and a capital gain or loss occurs whenever units are sold. A disposition is deemed to have occurred whenever:

  • Units are sold for Canadian dollars
  • Units are converted into US dollars or any other foreign currency
  • Units of one cryptocurrency are exchanged for units of another cryptocurrency
  • Units are spent on goods and services

AdjustedCostBase.ca can help you with calculating ACB and capital gains for Bitcoin and other cryptocurrencies.

Let’s look at an example:

  1. Buy 2.5 Bitcoins for CAD$3,226.95 in total on February 1, 2017
  2. Buy 3.8098 Bitcoins for CAD$5,470.87 in total on April 1, 2017
  3. Trade 1 Bitcoin for 22.55657 Ether on May 1, 2017 (where the value of 1 Bitcoin or 22.55657 Ether was CAD$13,951.22 at this time)
  4. Purchase goods valued at CAD$466.25 for 0.03342 Bitcoins on December 1, 2017
  5. Sell 4.5 Bitcoins for CAD$62,797.50 in total on December 1, 2017.

The first step to calculate gains on losses on AdjustedCostBase.ca is to create securities for each cryptocurrency you’ve traded.  For this example, we create securities named “Bitcoin” and “Ether.”  For further information on getting started on AdjustedCostBase.ca, and adding securities and transactions, see the following:

Getting Started on AdjustedCostBase.ca

For the above example, you would input the following transactions on AdjustedCostBase.ca:

1. “Buy” transaction: 2.5 Bitcoins for $3,226.95 in total on February 1, 2017
2. “Buy” transaction: 3.8098 Bitcoins for $5,470.87 in total on April 1, 2017
3a. “Sell” transaction: 1 Bitcoin for $13,951.22 in total on May 1, 2017
3b. “Buy” transaction: 22.55657 Ether for $13,951.22 in total on May 1, 2017
4. “Sell” transaction: 0.03342 Bitcoins for $466.25 in total on December 1, 2017
5. “Sell” transaction: 4.5 Bitcoins for $62,797.50 in total on December 1, 2017

For simplicity transaction fees have been omitted, but these can be specified in the “Commission” field when adding transactions.

The transaction involving conversion from Bitcoin to Ether (3) corresponds to a sale of Bitcoin and a purchase of Ether.  The amounts are based on the values in Canadian dollars.  Even though the transaction did not involve converting Bitcoin into Canadian dollars and then converting Canadian dollars into Ether, the transaction is treated this way for the purposes of calculating adjusted cost base.  This results in a capital gain for Bitcoin.

Similarly, the transaction involving spending Bitcoin (4) corresponds to a sale of Bitcoin.  Even though the transaction did not involve Bitcoin units being converted into Canadian dollars followed by a purchase using Canadian dollars, the transaction is treated this way for tax purposes.  This also results in a capital gain for Bitcoin.

Here are the results after inputting these transactions:

Transactions for Bitcoin

Transaction for Ether

10 thoughts on “Capital Gains when Trading Bitcoins and other Cryptocurrencies

  1. crypto

    Thank-you for this tool, it’s great!

    Do you know if transaction fees (mining fees) can be added to the commission when calculating the ACB?

    For example if one buys bitcoin on coinbase, then moves it to Binance. There is a coinbase fee when buying bitcoin and then the mining fee (transaction) to send to Binance, can the mining fee be added to coinbase’s commission fee in the ACB calculation?

  2. AdjustedCostBase.ca Post author

    Crypto,

    Transaction fees for buying or selling cryptocurrencies can be inputted as commissions.

    I’m not sure about the transfer fees you mentioned. If these are not directly related to purchasing or disposing of Bitcoins then I don’t think they can be added to ACB or subtracted from proceeds of disposition.

  3. Gili

    In your example:

    * Trade 1 Bitcoin for 22.55657 Ether on May 1, 2017 (where the value of 1 Bitcoin or 22.55657 Ether was CAD$13,951.22 at this time)

    How do you determine the value of Ether in terms of CAD at the time of the trade when some exchanges don’t trade any fiat currencies at all?

  4. AdjustedCostBase.ca Post author

    Gili,

    Even if your exchange does not permit exchanging between Ether and CAD, it should still be possible to determine an approariate exchange rate. I would suggest looking up the exchange rate between Ether and CAD from a reliable source. You can also look up the value of Ether in USD and the CAD/USD exchange rate on that date and combine those two values.

  5. Gili

    Some (major) exchanges do not trade fiat currencies at all. Example: binance.com

    As such, there is no universal cryptocurrency to fiat conversion rate you could apply using information exclusively from that exchange.

  6. AdjustedCostBase.ca Post author

    Gili,

    Please see part 3 of the example above for an exchange between two cryptocurrencies that does not involve a direct exchange with Canadian dollars.

  7. Gili

    I know that part 3 involves the trade of one cryptocurrency for another, but it does not explain how one is supposed to derive the CAD value of each currency on exchanges that do not trade any fiat currencies.

  8. AdjustedCostBase.ca Post author

    Gili,

    You can look up the value based on a chain of conversion rates. For example, the site you mentioned currently shows a price of 0.0015642 Bitcoin for 1 EOS. Yahoo Finance currently shows CAD$8,766.22 for 1 Bitcoin. Therefore if you bought 1 EOS, your increase in ACB could be calculated as:

    1 EOS x 0.0015642 Bitcoin/EOS x CAD$8,766.22/Bitcoin
    = CAD$13.71

  9. Lawrence

    Hello,

    Is it possible that through ACB, you can ultimately end up with capital gains even if you don’t make a profit? That is, supposing I buy into cryptocurrencies at $10,000, move them around through various altcoins over the course of the year, then finally take them out at the same buy-in price of $10,000, I somehow owe tax on it?

    That’s the result I’m getting when using various ACB calculators (including this one): tax owed, despite not making a profit. Is this possible, or do I have an error somewhere?

    Thanks,
    Lawrence

  10. AdjustedCostBase.ca Post author

    Lawrence,

    Assuming that there are no further investments or withdrawals, then your net capital gain should be zero. If your transactions span multiple tax years, then it’s possible to have gains or losses in individual years, but they should cancel each other out.

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