In Canada Bitcoin and cryptocurrencies are regarded as items of commerce in the eyes of The Canada Revenue Agency (CRA). The CRA recognizes cryptocurrency transactions as barter transactions, making them subject to income tax.
The losses and gains from these trades have to be disclosed when filing your taxes. Typically, people would include these numbers on schedule C. If you are trading in cryptocurrency as a “business”, it may be taxed as income. Always consult with a tax professional to decide what constitutes your trading.
Information on capital gains taxation is available on the Canadian Government’s website. The standard date for filing tax returns to Canada is April 30.
The tax treatment of cryptocurrency for tax purposes
The term “cryptocurrency” refers to a digital representation of value that isn’t legal tender. This is an electronic asset often referred to as an altcoin or crypto-asset which functions as a method of exchange of products and services between people who have agreed to make use of it. Secure encryption methods are employed to ensure that cryptocurrency is constructed and also to validate transactions. They generally work independently from a central bank or central authority.
How can I determine my losses in crypto for tax purposes?
To calculate your total losses:
The first step is to determine the net sum of your gains and losses over the long term as well as losses on other assets that are not crypto.
Find the net sum of your profits and losses which includes gains and losses on all other assets that are not crypto.
Find your total capital gains or losses by taking the net amount of gains and losses in the long-term and the short-term.
If you’re experiencing an unintentional loss across all capital assets, you can deduct up to $3,000 from those losses and carry on additional losses to offset any future capital gains.
The calculation of these losses and deductions isn’t easy if you have a huge or complex portfolio. However, using tax software that is crypto can make this process much more simple.
How to Claim Crypto Losses on Taxes in Canada?
It’s first important to be aware that the IRS defines cryptocurrency as an asset of the capital value and each tax-deductible event must be documented on an IRS Tax Form 8949, which is for cryptocurrency that includes crypto losses. If you’re dealing with crypto losses that you need to include in your taxes, you can or use them to offset capital gains or take a deduction of up to $3,000 per year from your normal income.
1. Make sure you report your losses in crypto on the IRS Tax Form 8949
In 2014, the IRS released Notice 2014-21 clarifying that cryptocurrency is considered property tax-free and each tax-deductible event has to be documented on an IRS Form 8949 for taxation of cryptocurrency like the sale of stocks.
For a refresher on crypto taxes, some of the frequently reported tax-paying events are:
- Sell your crypto to make money
- Trade one digital currency
- Utilizing cryptocurrency at a store to pay (for those using cryptocurrency debit cards this applies to you too)
- In each bitcoin transaction or other cryptocurrency, transaction Be sure to record details about the currency, as well as the date you bought and sold the cryptocurrency, the costs and profits as well as your gross capital loss or gain.
It is then necessary to move the entire amount to Schedule D The supporting Schedule D of Form 1040, where you must report your profits and losses during the year. For a step-by-step guide to this procedure, visit our blog post on How to Report Cryptocurrency for taxes.
How TaxBit can help you report your cryptocurrency losses to tax
TaxBit generates the mandatory IRS Form 8949, a cryptocurrency-related tax return. It is then transposed onto the schedule “D” tax form. The Schedule D (Form 1040) is used to document the exchange or sale of capital assets not being used to make a profit or for business. It is important to note that income from ordinary sources is not included as income on Schedule D. The mining income crypto will be reported as normal income, just like reporting earnings from employment on a Form W-2.
You can offset capital gains by absorbing cryptocurrency losses
As previously mentioned the loss of cryptocurrency can be utilized to reduce capital gains and lower the tax burden. Knowledgeable cryptocurrency traders frequently sell their assets at a loss to reduce capital gain using the strategy of harvesting tax losses.
If you are attempting to offset your capital gains and losses, you must be aware of the period of holding for the assets. It is only permitted to offset capital losses over long periods against capital gains that are long-term or short-term capital loss against short-term capital gains. After you’ve offset losses of similar nature then you can offset either short-term or long-term losses against capital gains that are short-term.
Take advantage of Capital loss deductibility when you report crypto losses on tax returns
Furthermore, the 26, U.S. Code SS 1211 of the Internal Revenue Code provides relief by way of loss deductions for capital assets. Particularly, taxpayers can claim a deduction of $3,000 in capital losses each year ($1,500 when married and file an individual tax return) from their normal income.
The claim of your cryptocurrency’s capital losses could result in an increase in your return on tax returns by taking this deduction. If a crypto investor suffers more than $3,000 of net capital losses during the tax year in which they are taxable, the additional losses could be carried forward to subsequent tax years. Taxpayers can then utilize losses to make up for capital gains in the next tax year, or take advantage of tax deductions for losses on capital once more.