How to Respond to the Crypto Rout

Cryptocurrencies are going through a major crisis and their value has collapsed.

• Read also: Warning: money wagered on cryptos is not protected at all

• Read also: Cryptocurrency: How to Lose US$16 Billion in a Flash

How to react ?

With the collapse of cryptocurrency values, which led to the bankruptcy of the FTX platform, many self-directed investors are waking up with a block problem (about 5% of the Canadian population would hold them).

Got some cryptos and wondering if you should liquidate them? And record tax losses? It depends on your priorities.

don’t panic

A basic investment principle is not to panic and sell at the worst time. We can say, between you and me, that we are living one of these moments! It’s better to wait for the crisis to pass.

Financial markets, cryptos included, are regularly affected by the bursting of speculative bubbles. If they continue to attract millions of investors, they will eventually recover.

However, you will have to be patient. Because it could be years before the value of your cryptos returns to its peak of a few months ago… if it does!

Take your losses

You can always sell your positions (if you find a buyer) and record a tax loss. Because all cryptocurrency gains and losses are taxable.

The tax authorities, however, do not consider them as financial assets, but as barter or countertrade. In other words, they are a commodity whose value must be converted into Canadian dollars.

For tax purposes, your loss will therefore be recognized by the tax authorities as a loss of business income or a capital loss, according to certain criteria.

If you do a lot of crypto trading, the Canada Revenue Agency (CRA) may consider it business (your gains or losses will be 100% taxable or deductible). Your crypto assets will then be recognized as reportable inventory at fair market value as of December 31.

The line could be thin in particular if you are mining cryptocurrencies: the tax authorities study each case individually.

And you may inherit a hefty GST and QST bill, despite your losses!

Otherwise, your crypto gains and losses will be recognized as capital gains or losses (taxed or deducted at 50%).

Such capital losses have an advantage: you can deduct them from the capital gains of your other investments.

Oh, I forgot! You can’t pay your taxes with cryptocurrencies….

Tips

  • It is mandatory: you must declare to the tax authorities your gains and losses related to cryptos when you have them (line 24 and appendix G: capital losses: line 127 and appendix 3). Otherwise, you expose yourself to fines and even prosecution for tax evasion. If the value of your cryptos exceeded $100,000 during the year, you must also complete the federal T-1135 form.
  • You must keep a record of all crypto transactions (with their addresses) made each tax year, including exchanges and the cost of software. Keep your supporting documents for six years.
  • If you bought a property with cryptos and the value of it has since increased, you must declare it to the tax authorities. This principle applies to any gain (or loss) made through a cryptocurrency exchange, the receipt of tokens related to crypto mining, the conversion of crypto to Canadian dollars, or payments made with crypto cards. ! For example, you can declare your transactions with the CoinLedger platform.
  • Also consult the guides of the tax authorities on cryptocurrencies, on the websites of Revenu Québec (bit.ly/3OA9HDg) and the Canada Revenue Agency (bit.ly/31pYPnv).

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