Introduction
Welcome to our guide on understanding and navigating your tax report. Designed with clarity in mind, this guide aims to decode the report's structure and translate it into straightforward, easy-to-understand information. In this guide, we'll show you how to interpret the data in your report.
Section 1: Settings
Users can tailor their preferences on the settings page prior to generating a report. This includes various options such as choosing a country and setting the tax report period. After the report has been generated and downloaded, users will be guided to the overview, as outlined in Section 2. The subsequent information highlights the most critical settings for this country.
Important Settings:
Accounting method
We understand that proper financial management is crucial when dealing with cryptocurrencies, which is why we provide multiple accounting methods for you to choose from. In Canada the only allowed accounting method is the adjusted cost base.
Here is a brief overview of the ACB method:
Adjusted Cost Base (ACB): This method calculates the average cost of all the shares or assets you own in a particular investment. It takes into account the total amount spent on acquiring the assets, including the purchase price and any additional costs, and then divides it by the total number of units held. ACB is often used in many jurisdictions for calculating capital gains or losses, offering a balanced approach that reflects the actual expenditure on the assets.
Additionally, we offer a variety of other accounting methods, including FIFO, LIFO, and HIFO. Please note that these are not permitted in Canada.
T1135 Foreign Property:
The T1135 Foreign Property report is a required form for Canadians holding foreign crypto worth more than CAD $100,000 at any time during the year. It provides the Canada Revenue Agency (CRA) with information on foreign investments like property, shares, and crypto. The report helps ensure that all foreign income is accurately reported and taxed according to Canadian law. Filing the T1135 is crucial for those meeting the criteria, as failure to comply can lead to penalties. If you are involved in foreign investments, it is wise to consult a tax professional to help with this important document.
Superficial loss
The superficial loss rule applies only to investors. It prevents them from claiming a capital loss if the same or identical cryptocurrency is bought or acquired by them or someone affiliated with them within 30 days before or after the sale. This rule ensures that losses are not artificially generated for tax benefits and is an essential feature in Canadian Adjusted Cost Base (ACB) reports.
Day trader
This feature differentiates the tax treatment for investors and day-traders. Investors are subject to the superficial tax loss rule and are required to pay taxes on 50% of their gains. On the other hand, day-traders are exempt from this rule and are required to pay taxes on 100% of the gains they make.
In addition to the functionalities already discussed, our platform offers numerous additional settings. For each setting, you will find an 'I ' symbol, this is the infobox which gives you detailed explanations about each setting. As you navigate the platform, these infoboxes will serve as your guide.
Section 2: Explanation of Transaction Types
Our tax report classifies transactions according to their respective tax regulations. Typically, transactions involving cryptocurrencies fall under the domain of capital gain, whereas any income earned or airdropped into your wallet is usually categorized as other income.
In this section, we aim to decode the various transaction types that can appear in your tax report. Understanding these transactions is crucial for identifying their tax implications, as well as their role as potential income sources. In this explanation, the following sections are elaborated on.
1.1. Realized cryptocurrency capital gains and losses
1.2. Realized derivatives gains and losses
1.3. Realized NFT gains and losses
1.4. Other income
2. Non-taxable income from cryptocurrency and NFT trading
3. Other cryptocurrency and NFT payments
Realized gains and losses
The transactions highlighted in the following section are basic transactions involving cryptocurrencies. These cryptocurrencies are purchased and then either sold in exchange for other cryptocurrencies or fiat currencies, or transferred to an external wallet not owned by you. The profits that arise from these transactions generally qualify as realized gains. Transactions usually triggering a gain include trade, spend, fees in cryptocurrency, remove, and provide liquidity.
Gains arise when a crypto asset appreciates in value. This appreciation, which enhances your capital or wealth, becomes taxable when the asset is sold or exchanged. In Canada, there are two distinct types of trading: investor trading and day trading. Day traders are subject to tax on 100% of their gains, while investors are taxable on 50% of the gains earned through cryptocurrency. Additionally, only for investors, the superficial loss rule applies, which prevents them from claiming a capital loss if a similar asset is repurchased within 30 days before or after the sale.
This is how gains are stated in CoinTracking
In July 2022, A bought 1 BTC for 100 CAD. By August 2022, A sold this 1 BTC for 200 CAD, thereby realizing a capital gain of 100 CAD. This 100 CAD profit is registered under section. 1.1. Realized cryptocurrency gains and losses.
Furthermore, profits from margin trading, derivatives, and futures are classified as gains, as they represent profits from the sale of assets. The precise categorization can vary based on local tax laws, but usually, when these types of investments are sold for more than the purchase price, the profit is considered a capital gain.
Transaction types typically regarded as gains from margins, derivatives, and futures include margin gain, derivatives/futures gain, margin loss, margin fee, derivatives/futures loss, and settlement fee.
On July 1, 2022, A made a margin profit of 100 CAD. On August 2, 2022, A incurred a margin loss of 50 CAD. As a result, A realized a capital gain of 50 CAD (100 CAD profit - 50 CAD loss). This 50 CAD gain is documented under section 1.2. Realized derivatives gains and losses.
Income
Cryptocurrency Income pertains to any form of earnings obtained through various crypto-related activities, which is subject to taxation when control over the crypto asset is established, and its value can be measured in real-world terms. It is crucial to note that the specifics of how cryptocurrency income is taxed can vary significantly between jurisdictions.
The following transaction types are typically considered as income: Income, Reward / Bonus, Staking, Mining, Airdrop, Masternode, Dividends income, Lending income, Interest income, Other income, LP Rewards.
On July 1, 2022, A received a mining reward of 0.5 BTC, valued at 20.000 CAD. Then, on July 2, 2022, A received an airdrop reward of 100 AVAX, worth 100 CAD. These forms of income, both from mining and airdrop rewards, are subject to the standard income tax rate and are collectively registered under section 1.4. Other income.
Non-taxable income
Non-taxable Cryptocurrency Income encompasses earnings from crypto-related activities that some jurisdictions do not subject to taxation. This might include certain types of airdrops or other forms of income. However, it is essential to note that not all countries recognize the concept of non-taxable cryptocurrency income. The tax obligations related to cryptocurrency vary greatly worldwide, and what is considered non-taxable in one jurisdiction may be taxable in another. Always consult with a tax professional or local tax authority for the most accurate information.
The following transaction types are typically considered as non-taxable income: Airdrop non-taxable, Income non-taxable.
On October 1, 2022, A received non-taxable income in the form of 1 BTC, valued at 40.000 CAD. This non-taxable income is documented under section 2. Non-taxable income from cryptocurrency and NFT trading.
Other cryptocurrency and NFT payments
Donations, gifts, stolen/hacked/fraudulent transactions, lost assets, commercial mining, and minting are reported separately. This is because the taxation for these types of transactions often varies between countries. Therefore, to accommodate these differences, these transactions are displayed separately.
On September 1, 2022, A received a gift/tip in the form of 1 BTC, valued at 40.000 CAD. This gift is recorded under section 3.1. Incoming donations and gifts.
Section 3: Transaction list
The Transaction List is a detailed record of all transactions that have taken place over a certain period. It includes:
Amount: Refers to the quantity of units bought or sold.
Date Acquired: The date when the unit was purchased or acquired.
Date Sold: The date when the unit was sold.
Buy/Input at: Buy/Input at is the Location of the purchase or the locations of the coin at the time of sale (when using depot separation).
Holding period in days: The number of days between the purchase and sale of a unit.
Type: Refers to the selected transaction type
Cost Basis in CAD: The original cost or value in CAD.
Proceeds in CAD: The amount received from the sale of the unit, expressed in CAD.
Gain/Loss in CAD: The financial gain or loss from the sale, calculated as the difference between the proceeds and cost basis.