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One of the biggest challenges is knowing if the revenue generated from your crypto activity is considered business income (or loss) or capital gains (or losses). The laws delineating the two are complex and require a sound legal opinion from a Crypto Tax Lawyer on how they apply to your specific transactions, considering all the nuances of your transactions.
T2125: Reporting Crypto as Business Income
Form T2125 is used to report income earned through a business or profession. It applies when your crypto activities are considered "a profession, calling, trade, manufacture or undertaking of any kind whatever and … an adventure or concern in the nature of trade." However, if a taxpayer conducts a certain sort of transaction occasionally or even once, the transaction may be regarded as an adventure or concern in the nature of trade, resulting in the revenue being classified as business income.
Generally speaking, if your crypto transactions go beyond passive investment, for example, you're trading and performing related transactions frequently, you are likely carrying on a business. In this case, you must report your gross revenue and deductible expenses on Form T2125.
Relevant deductions might include hardware costs, electricity bills, software subscriptions, and internet fees. But the CRA expects reasonable recordkeeping. You'll need clear documentation tying those expenses to your crypto operations. Filing T2125 accurately also means reporting your net income, which becomes fully taxable at your marginal rate.
Schedule 3: Reporting Crypto Sales as Capital Transactions
If your cryptocurrency activity qualifies as capital in nature rather than business income, you must report all dispositions using Schedule 3 (Capital Gains or Losses). This form is where Canadians declare gains or losses resulting from the sale or exchange of capital property, including digital assets such as Bitcoin, Ethereum, and other tokens.
A crypto disposition occurs whenever you sell, trade, convert, or use cryptocurrency in a transaction. For tax purposes, each event must be reported individually, and the resulting capital gain or loss must be calculated using the adjusted cost base (ACB) of the asset disposed of. The ACB represents the fair market value of the crypto holdings you acquired, including any associated transaction fees, converted into Canadian dollars at the time of purchase.
Schedule 3 requires you to provide the following for each disposition: the date of acquisition, the date of sale or transaction, the proceeds of disposition, the ACB, and the resulting gain or loss. Only 50 percent of a capital gain is taxable, but 100 percent of a capital loss can be used to offset other capital gains in the current or future tax years. Losses from crypto activity cannot be applied against employment or business income.
T1135: Disclosing Foreign Crypto Holdings
Form T1135 must be filed if you own "specified foreign property" worth more than CAD $100,000 at any point during the tax year. This includes crypto held outside of Canadian exchanges, such as on Binance, Coinbase, or through offshore wallets.
The CRA's interpretation of what qualifies as foreign property is still evolving, but the conservative approach is to disclose all qualifying crypto holdings abroad if they exceed the reporting threshold. The form asks for detailed information: the country of the exchange or wallet provider, the maximum and year-end fair market value, and income or gains earned.
Failure to file T1135 on time can result in automatic penalties starting at $25 per day, up to a maximum of $2,500. This is a disclosure form, not a tax calculation form, meaning it doesn't result in additional tax, but omissions are treated seriously.
Final Thoughts
Navigating crypto tax reporting in Canada is not just about understanding the tax rate; it's about correctly categorizing your activity and knowing which forms apply.
The CRA is increasing its scrutiny of digital asset activity. Whether you're mining Ethereum in your basement, holding Solana on a U.S. exchange, or simply trading Bitcoin occasionally, consulting a crypto tax lawyer to help you understand your exact tax obligations is not optional. It's a core part of responsible crypto investing in Canada.
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