As Crypto Gains Popularity, Understanding Its Tax Implications Becomes Increasingly Crucial

By late 2024, the cryptocurrency landscape is dynamic and evolving, driven by a blend of regulatory developments, technological innovations, and market trends. The outcomes of the U.S. election in November 2024 caused a spike in crypto prices and drew numerous new investors. As the crypto market continues to evolve, investors must understand the tax implications of their crypto gains and how their tax residency will impact that.

Countries with the Highest Crypto Tax Rates

Denmark has one of the world's highest personal tax rates on cryptocurrency. The Danish Tax Agency taxes up to 53% of both long-term and short-term capital gains from cryptocurrency. These gains are considered personal income, making them subject to the same progressive tax rates as other earnings. Other countries imposing high tax rates on crypto gains include Ireland and Iceland. These nations have high tax rates on both short- and long-term crypto holdings compared to other countries, reflecting their commitment to social welfare programs, particularly in the Nordic countries.

European Countries Have Diverse Tax Rates on Crypto Gains

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

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

In Malta, a different requirement applies, where long-term crypto holdings are taxed at 0% only if considered an investment rather than trading activity (short-term trades) or part of a business. Taxpayers should be mindful of the differing 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, trading 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 trading frequency and trader intent, trading activities may be taxed as ordinary income. Once you have a taxable capital gain, it is taxed at your marginal tax rate. The rate depends on your total taxable income and your living province or territory.

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

Many locations act as tax havens for crypto investors. Several countries allow individual crypto investors to keep 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 boost economic growth. These locales offer appealing tax rates for crypto investors and potential high-value tax planning opportunities. If you wish to explore your tax planning options, consult with one of our top Canadian crypto tax lawyers for advice.

Pro Tax Tip: Crypto Gains Realize Even on Token Swaps

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

Thus, after the swap, even if the new crypto coin is simply held, a capital gains tax may apply. The fair market value of the coins on swap day will determine the capital gains tax amount. It is vital to keep detailed records of all trades to prevent future issues. For guidance on calculating crypto gains, consult with one of our top crypto tax lawyers in Dallas.

FAQ

I've realized I have unpaid taxes for my crypto gains. What should I do?

If you haven't reported crypto gains, filing a voluntary disclosure is the best action. Voluntary disclosure applications offer significant benefits, including penalty and interest relief. It is always better to file a voluntary disclosure sooner than later, as CRA actions can jeopardize program eligibility. If you wish to apply to the Voluntary Disclosures Program, our expert Canadian tax lawyers would be happy to assist.

Can I Deduct Cryptocurrency Losses?

Yes, you can generally deduct cryptocurrency losses like other capital losses. If you sell crypto at a loss, you can use that loss to offset other capital gains or, in some cases, ordinary income if crypto gains qualify as business income. The typical capital loss rules apply, so losses may be carried back 3 years and carried forward indefinitely. This allows capital losses to offset capital gains from the past 3 years, potentially refunding taxes paid in those years.

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

You must sever significant ties with Canada to cease Canadian tax residency. Tax residency isn't automatically severed by moving or gaining citizenship elsewhere, and multiple factors should be considered when assessing tax residency. If you're a digital nomad and cease Canadian tax residency, you'll still be taxed on Canadian-sourced income. If you remain a Canadian tax resident, you'll be taxed on worldwide income, and a tax treaty may provide tax credits to prevent double taxation. Severing and establishing new tax residency could be complicated, depending on underlying circumstances. Consulting an expert Canadian tax lawyer is advisable for proper guidance.

When a Canadian resident leaves Canada and becomes a non-resident, a "departure tax" may apply, essentially taxing unrealized capital gains of their property. This tax isn't just a fee for leaving, but an assessment of asset value increase up to departure. The Canadian government treats this as a deemed asset sale when leaving the country.

How it works:

• Upon leaving Canada, you're considered to have disposed of most assets for tax purposes, even if not sold. This is a "deemed disposition."
• You must pay tax on accrued capital gains on those assets until your departure date.
• Common assets subject to departure tax include real estate, investment property, and crypto assets.

DISCLAIMER: This article provides general information only. It's up to date as of the posting date. It hasn't been updated and may be outdated. It doesn't provide legal advice and shouldn't be relied upon. Every tax scenario is unique and will differ from the examples in this article. For specific legal questions, seek advice from a Canadian tax lawyer.