With Crypto Becoming More Mainstream, Understanding Its Tax Implications Is Increasingly Important

As of late 2024, the state of cryptocurrency is dynamic and evolving, influenced by a combination of regulatory developments, technological innovations, and market trends. The results of the U.S. election in November 2024 spurred a rise in crypto prices and drew many new investors to the market. As the crypto market continues to evolve, it is essential for investors to comprehend the tax implications of their crypto gains and how their place of tax residence will affect that.

Countries With the Highest Crypto Tax Rates

Denmark imposes one of the highest personal tax rates on cryptocurrency worldwide. The Danish Tax Agency taxes up to 53% of both long-term and short-term capital gains from cryptocurrency. These gains are treated as personal income, thus subject to the same progressive tax rates as other income forms. Other countries with high crypto tax rates include Ireland and Iceland. These countries have high short- and long-term crypto holding tax rates compared to others, aligning with their commitment to social welfare programs, especially in the Nordic countries.

European Countries Have Mixed Tax Rates on Crypto Gains

European countries offer differential crypto taxation depending on whether it is traded short term or held long term. Generally, long-term holdings in these countries receive the most favorable tax treatment. In Germany, long-term cryptocurrency holdings are taxed at 0%, offering substantial tax benefits.

While short-term gains are taxed up to 45% if assets are sold within a year, profits are tax-free if the crypto is held for more than a year before selling or if the profit is below €1,000, starting in 2024. Additionally, cryptocurrency income is exempt from tax if it is below the €256 exemption limit. Similarly, in Luxembourg, long-term capital gains from cryptocurrency are taxed at 0% if the assets are held for over six months. Assets sold in under six months' time are considered short-term gains and attract a 42% progressive income tax rate. Belgium also offers a 0% tax rate on long-term crypto gains, but the condition here is that crypto trading transactions must be considered part of the normal management of private assets to qualify for favorable tax treatment.

In Malta, a different condition applies, where long-term crypto holdings are taxed at 0% only if they are held as an investment, not considered trading activity (short-term trades) or part of a business. Taxpayers should be cautious of the differential treatment of crypto gains in European countries as the treatment can yield unexpected results depending on how long it is held and the country's policies.

Canada's Tax Treatment of Crypto Gains

Disposing of crypto, such as selling it, trading it for another crypto, or using it for purchases, triggers capital gains tax in Canada or is taxed as business or property income. In Canada, 50% of capital gains are taxable, and 50% of capital losses can be used to offset these capital gains.

Depending on the frequency of trading and the trader's intention, trading activities may be taxed as ordinary income. Once you have a taxable capital gain, it is taxed at your marginal tax rate, depending on your total taxable income and the province or territory in which you live.

Where Is the Best Place for a Crypto Investor to Keep Profits?

When it comes to crypto tax-haven locations, several contenders exist. Many places allow individual crypto investors to retain all their crypto profits, as they impose no tax on cryptocurrency gains. These countries include Bahrain, Barbados, Bermuda, the Cayman Islands, Hong Kong, Malaysia, Singapore, and the United Arab Emirates. Notably, Bermuda adopted bitcoin as legal tender in 2021 to attract crypto investment and stimulate economic growth. These locations offer appealing tax rates for crypto investors and potential high-value tax planning opportunities. If you would like to explore your tax planning options, consult with one of our top Canadian crypto tax lawyers for advice.

Pro Tax Tip: Crypto Gains Are Realized Even On Token Swaps

In Canada, like traditional capital assets, an unrealized gain from crypto crystallizes when the asset is sold. However, this doesn't mean the gain only crystallizes when the crypto is ultimately exchanged for fiat currency. It means the gain potentially crystallizes when one coin is swapped for another.

Therefore, after the swap, even if the new crypto coin is simply held, there may still be a capital gains tax payable on the swap. The fair market value of the coins on the swap day will determine the capital gains tax amount. It is crucial to maintain comprehensive documentation of all trades to avoid future issues. If you need guidance on calculating your crypto gains, consult with one of our top Miami crypto tax lawyers.

FAQ

I now realize that I have unpaid taxes for my crypto gains. What do I do?

If you have unreported crypto gains, the best course of action is to file a voluntary disclosure. Voluntary disclosure applications have significant potential upsides, including penalty and interest relief. It is always better to file a voluntary disclosure application sooner rather than later, as CRA actions jeopardize your eligibility for the program. If you would like to file an application to the Voluntary Disclosures Program, our expert Canadian tax lawyers would be happy to assist you.

Can I deduct cryptocurrency losses?

Yes, you can typically deduct cryptocurrency losses just like you would with other capital losses. If you sell crypto at a loss, you can use that loss to offset other capital gains or, in some cases, offset ordinary income if the crypto gains qualify as business income. The ordinary rules on capital losses apply, so losses may be carried back 3 years and carried forward indefinitely. This means that capital losses can be used to offset capital gains from the previous 3 years, enabling a taxpayer to receive a refund for taxes paid in those years.

I am thinking of becoming a digital nomad and leaving Canada for a low-tax crypto destination. What are the tax considerations?

You must ensure that you sever significant ties with Canada to cease your Canadian tax residence. Tax residence is not automatically severed by moving or gaining citizenship in another country, and numerous factors must be considered when assessing tax residence. If you are a digital nomad and cease your Canadian tax residence, you will still be taxed on your Canadian-sourced income. If you remain a Canadian tax resident, you will be taxed on your worldwide income, and a tax treaty may apply to grant tax credits to avoid double taxation. Severing and establishing a new tax residence could be complex depending on one's situation. It is advisable to contact an expert Canadian tax lawyer for assistance on the matter to ensure it is done properly.

When a Canadian resident leaves Canada and becomes a non-resident, he or she may be subject to a "departure tax," essentially a tax on the unrealized capital gains of their property. This tax is not a fee for leaving, but rather an assessment of the increase in the value of certain assets owned up to the point of departure. The Canadian government treats this as a deemed sale of assets upon leaving the country.

How it works:

• When you leave Canada, you are considered to have disposed of most of your assets for tax purposes, even if you haven't actually sold them. This is called a "deemed disposition."
• Tax must be paid on the capital gains accrued on those assets up until the departure date.
• Common assets subject to departure tax include real estate, investment property, and crypto assets.

DISCLAIMER: This article provides broad information only. It is up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied upon. Every tax scenario is unique and will differ from the instances described in the article. If you have specific legal questions, seek the advice of a Canadian tax lawyer.