A Quick Guide to Investing in and Filing Taxes on Crypto
2021 was a big year for crypto. Bitcoin reached an all-time high of $68,000 in November, non-fungible tokens (NFTs) picked up steam, and El Salvador became the first country to accept a cryptocurrency as legal tender. Though there were some setbacks — China, which previously accounted for 3/4 of the world’s crypto mining, banned the practice last June — recovery has been swift. In particular, we reported that the majority of mining activities were diverted to Canada, helping local mining firms see gains as early as September.
Indeed, it’s a great time for anyone considering to start investing in crypto. If you’re wondering how to get started, this quick and simple guide can help you navigate the ins and outs of buying crypto and filing gains on your tax returns.
Picking a crypto exchange
The most common way to buy crypto is through an exchange. Exchanges act like brokers when one buys stocks or trades in the forex market. Through an exchange, you can trade-in your CAD for crypto or exchange one cryptocurrency for another. Exchanges can be centralized (CEX), decentralized (DEX), or a mix of the two (hybrid).
For a fee, CEXes like Robinhood or Coinbase allow you to place orders for a certain amount of cryptocurrency. It’ll then match you up to a buyer or seller willing to take your order. Meanwhile, DEXes simply facilitate connections between buyers and sellers, so you have more control over who you choose to trade crypto with. Hybrid exchanges like Qurrez incorporate elements of both.
Regardless of the exchange you choose, it’s important to do some background checks to determine if they’re regulated by the appropriate government authorities. Crypto-asset trading platforms are now required to register with the Investment Industry Regulatory Association of Canada to operate in Nova Scotia, New Brunswick, Ontario, and Quebec. Using registered exchanges will guarantee your data and transactions are safe from security breaches.
Buying and storing crypto
Once you’ve got a crypto exchange, you’re ready to start buying. A rule of thumb is only to buy as much crypto as you can lose. This will protect you from the volatility the crypto market is known for. As mentioned earlier, you can exchange cryptocurrencies for CAD or other cryptocurrencies, and vice versa. Banks like the Royal Bank of Canada and online merchants like PayPal can help facilitate CAD-based transactions, while many companies including Bylls and Purse allow you to use crypto to buy their products or services.
If you’re planning to hold onto your crypto, you’ll need somewhere to store them. Though you can always hold them directly on exchanges, it’s better to have a crypto wallet. These are technically blockchain-based bank accounts protected by extremely complex codes known as public and private keys. These keys are difficult to memorize and serve to keep your assets safe. Crypto wallets can be hot (based online) or cold (stored in an external hard drive). Either way, they’re a must-have for serious crypto investors.
There are other ways to buy crypto that might suit your investment style better. Crypto trading platforms aggregate information from different exchanges to help you find the best prices. Physical crypto ATMs allow users to buy currencies like Bitcoin with debit or credit cards. You can also opt to simply find people in your area willing to trade with you.
Determining how your gains will be taxed may be among your biggest questions as a budding crypto investor. Though Canadian tax law has previously been vague on the subject, regulation has steadily increased as crypto continues to enter the mainstream.
If your crypto activity is commercial in nature, involves promoting crypto products or services, is done to turn a profit, or occurs in a regular or repetitive fashion, it’ll be counted as part of your income. Since provincial tax varies across the country, you might want to use a dedicated tax calculator for Nova Scotia. This will help you get a more accurate picture of how much you owe once your crypto gains are incorporated into the net income you’ve generated in a financial year.
Meanwhile, trading crypto for CAD or other cryptocurrencies, using crypto to buy goods or services, or gifting crypto to others will fall under capital gains tax. However, only the profits made from each transaction need to be reported to the CRA. What’s more, crypto investors are only required to pay capital gains tax on half of their net capital gains in a single financial year. If you’re still in doubt about how you want to play your cards, you can always choose to consult a certified crypto tax accountant.
Ultimately, having basic knowledge of the world of crypto can only give you a head start in what many believe to be a highly technical market. With investment analyst Mike Young predicting a positive outlook for crypto heading into 2022, entering the market now guarantees significant returns and a more holistic investment portfolio.
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