Financial planner outlines the tax obligations that come with crypto investing – and what could lie ahead
Amid the surge in returns for bitcoin and other cryptocurrencies last year, there was a rise in the number of headlines announcing moves by financial firms into the digital asset space. At the same time, crypto exchange platforms, like other investing platforms, saw their user bases increase. Securities regulators across Canada, in keeping with their mandates for investor protection through oversight, have also asked exchange operators to register as investment dealers.
Against that backdrop of increased activity – along with some well-placed promotions via social media and TV commercials – it’s no wonder many advisors are getting more questions about crypto from clients. That includes Graham Plumb, QAFP and founder of Moola Financial Coaches and Advisors in B.C.
“I get lots of questions from clients about cryptocurrency,” Plumb told Wealth Professional. “I would say about 40% of clients ask me about cryptocurrency, if they should own it, and if I own it. … I think people just don’t know, but they’re genuinely curious about it.”
As someone with a few cryptocurrency investments in his portfolio, Plumb is quite comfortable talking about them. For clients who are interested, he recommends starting by taking a course to get educated on cryptocurrency, just like they would for any asset class they’re considering.
While a lot of conversations talk about cryptocurrency from an investment risk and performance standpoint, not a lot has been about the tax implications. Maybe it’s because it isn’t an exciting topic – or maybe it’s just that there isn’t that much to explain.
“The CRA has been fairly clear about how cryptocurrencies are taxed,” Plumb said. “From a taxation perspective, it’s approach very similarly to when someone purchases publicly traded securities.”
If someone just invests in cryptocurrencies as part of their own wealth portfolio, and not as a business, then any increase in value they realize from selling a cryptocurrency they own will be taxed as a capital gain. But if they’re operating a cryptocurrency investment account as a business or a way to earn income as a job, realized gains from those activities will be taxed as business income.
What a lot of novices to crypto investing overlook, Plumb says, is how certain rewards are also counted. Many crypto trading platforms offer rewards like coins or tokens as incentives for users to provide liquidity to the crypto system. The practice can be likened to how banks offer interest to people who open checking or savings accounts and deposit money with them.
“It does depend on the exchange. Different exchanges will provide different rewards,” he says. “From a taxation point of view, those rewards need to be included in their capital gains.”
For Canadians who may want exposure to cryptocurrencies, but don’t want to deal with the associated technological challenges or taxation aspects, Plumb says cryptocurrency funds and ETFs can be a good solution.
For a certain management fee, investors in crypto funds and ETFs would pay the manager to take on the risks and hassle that come with maintaining a crypto wallet, trading cryptocurrencies on exchanges, and paying taxes, among other things. And unlike direct cryptocurrency investments, crypto ETFs and mutual funds can be held in registered accounts like RRSPs and TFSAs.
Read more: RRSP vs TFSA: which is better?
“It's important to always consult a financial planner when making any financial decisions,” he adds. “Studies have shown that those who use a financial planner are much better off.”
The need for professional planning and advice in crypto investing may also increase in the future as tax rules become more sophisticated. Just as taxation of publicly traded securities and other asset classes have evolved to include dividend or interest tax rates applied to rewards, Plumb believes tax authorities will develop more nuanced rules to capture the transactions and monetary arrangements that investors and traders in crypto engage in today.
“There are many strategies people use in the cryptocurrency world to provide themselves with monthly income, just as somebody who holds a stock that pays a dividend does,” he says. “If that's how you're doing your crypto investing, you should pay the same tax rate as somebody who's receiving dividends.”
