When you invest in rental property, stocks, and, of course, cryptocurrency in Canada, any profits you make are subject to capital gains tax. While taxes are a part of investing, there are ways to reduce your tax liability and optimize the return on your investments.
To take full advantage of all possible deductions and credits available to you based on your unique financial position and long-term financial goals, get professional tax planning services provided by the experts at CryptoTaxLawer.com. Not only can you optimize your investment returns, but they are crypto tax and investment specialists.
In the meantime, here are a few options for reducing your capital gains tax obligations.
Taxable Crypto Currency Activities!
These events are considered taxable in Canada when it comes to cryptocurrencies:
When you trade cryptocurrencies on exchanges, each trade is considered a taxable event. To calculate the taxable amount, you subtract the cost basis (the original purchase price) from the proceeds of the trade. The difference determines your capital gains or losses.
If you mine cryptocurrencies, the value of the coins you receive is treated as business income and is subject to taxation. Make sure to keep accurate records of the fair market value of the coins at the time of mining.
Using cryptocurrencies to pay for goods or services also has tax implications. The value of the cryptocurrency at the time of the transaction should be reported as income, based on the fair market value of the items purchased.
Strategies for Reducing Your Capital Gains Tax!
1. Use the Lifetime Capital Gains Exemption
If you are a small business owner or farmer in Canada, you may be eligible for the lifetime capital gains exemption (LCGE). This deduction allows you to exempt a portion of your capital gains from tax. To qualify, you must meet specific criteria, such as owning qualified small business corporation shares or qualified farm or fishing property.
2. Use Tax-Loss Harvesting
Tax-loss harvesting is a strategy that involves selling investments with unrealized losses to offset capital gains.
If you have crypto investments that have decreased in value, consider selling them to generate capital losses. These losses can be used to offset any taxable gains from other investments, including cryptocurrencies.
However, it’s important to adhere to the “superficial loss rule,” which states that you cannot repurchase the same or identical investment within 30 days before or after the sale.
3. Take Advantage of TFSA and RRSP Accounts
The Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) are tax-advantaged accounts in Canada. But holding your cryptocurrencies within these accounts is not allowed except for exchange-traded funds (ETFs). By holding cryptocurrency ETFs in these accounts, you can defer or eliminate capital gains tax.
Contributions to your TFSA are made with after-tax dollars, and any growth or withdrawals are tax-free. By contrast, contributions to your RRSP are tax-deductible, and you only pay taxes upon withdrawal during retirement when your tax rate may be lower.
4. Consider Incorporation
For individuals heavily involved in cryptocurrency trading, incorporating a business may provide tax advantages. By operating as a corporation, you can separate personal and business assets, potentially reducing your capital gains tax liability.
Corporations have different tax rates and rules compared to individuals, including the ability to carry forward losses and access additional deductions. However, incorporating a business involves various legal and financial considerations, so it’s essential to seek professional advice to understand the implications fully.
5. Gift or Donate Cryptocurrencies
Another strategy to reduce capital gains tax is to gift or donate your cryptocurrencies. Gifting cryptocurrency to a spouse or adult children can help shift the tax liability to individuals in lower tax brackets but beware of potential immediate taxation as a result of the gift or donation.
Additionally, donating your cryptocurrencies to registered charities can provide a tax deduction for the fair market value of the donated amount. Make sure you follow the rules and regulations for gifting or donating assets, including obtaining proper valuation and documentation.