Are Cryptocurrency Losses Tax Deductible?
With a market cap now valued in the trillions, the tax implications of cryptocurrency gains have been a common concern in recent years due to its unprecedented growth. However, crypto is now experiencing a marked downturn, with Bitcoin down to less than half of its all-time high and prominent tokens such as LUNA crashing to zero. In light of these events, many are now experiencing losses with respect to their crypto portfolios as they exit the market. While losses are always regrettable, could there be a silver lining? This blog post will explore the potential tax implications of crypto losses and whether they can serve as a valid deduction.
Business or Capital
An important consideration with regards to cryptocurrency losses is whether the cryptocurrency was acquired in the course of business activity. In Canada, income and capital gains are handled differently for tax purposes, and so it is important to establish whether your trading activity qualifies as a business activity. The following are some common tells as to whether cryptocurrency trading qualifies as business activity:
- Trading for commercial reasons or in a commercially viable manner;
- Associated business activities such as preparing business documents or acquiring capital;
- Promoting or advertising a related product or service;
- Showing an intention to make a profit; and
- Regularity and repetition of trading.
Needless to say, what qualifies as business activity is quite broad and the CRA has stated that in certain circumstances even a single trade can be considered a business activity. For this reason, it is important to consider the tax implications of each of these designations. A tax professional that specializes in cryptocurrency will be able to best advise individuals as to the potential tax benefits or liabilities of each distinction.
If your cryptocurrency trading rises to the level of a business, you are able to deduct your losses against other sources of business income.
If your cryptocurrency trading is not considered a business, your losses are most likely capital losses and may be deducted against other capital gains. A capital loss is when you sell or are deemed to have sold a capital property for less than its adjusted cost base plus all outlays and expenses involved in the sale. The rate for allowable capital losses (“ACL”) follows a similar formula to that of taxable capital gains and is known as the “inclusion rate” (“IR”). This rate is 50% of the gain or loss, meaning you would take your capital loss and multiply it by 0.5 to calculate how much of the loss is deductible. To determine what your capital loss is, you would subtract the price of the property plus expenses, also known as the adjusted cost base (“ACB”), along with all applicable disposition outlays and expenses from the proceeds of the disposition. The formula is as follows:
(Proceeds of Disposition – (ACB + Outlays & Expenses)) * IR = ACL
To give an example, say John purchased $10,000 worth of BTC in 2021 and paid $200 in fees. In 2022, due to the falling price, John decides to sell all his BTC for $5,000 plus $100 in fees. He would use the above mentioned formula to calculate his ACL:
(5,000 – (10,200 + 100)) * 0.5 = -2,650
As a result, John would have an allowable capital loss of $2,650 with respect to his BTC disposition. This loss can be offset against John’s income and could potentially lower his tax liability.
While the future of the crypto market is far from certain, the deductibility of crypto losses is relatively clear. In situations where crypto dispositions are deemed to be a capital loss, cryptocurrency follows the same deduction rules as other forms of capital property. Additionally, where crypto sales are determined to be on account of business, the losses are deductible against other business income. If you have questions or need help with cryptocurrency taxation, give us a call today!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.