As cryptocurrency becomes more mainstream and widely recognized, more Canadians are considering using it for gifting purposes. However, the tax implications of gifting crypto assets can be complex. The information in this article explores key considerations and strategies for gifting cryptocurrency in Canada from a tax efficiency perspective.
Please note that this information is general in nature; always consult an experienced crypto tax lawyer before making significant cryptocurrency transactions or filing your tax return.
Deemed Disposition Rule
In Canada, when you gift cryptocurrency, it’s considered a disposition for tax purposes. This means that even though you’re not selling the crypto, the Canada Revenue Agency (CRA) treats it as if you’ve sold it at fair market value. As a result, you may need to report capital gains or losses on your tax return.
Capital Gains Tax
If the value of the cryptocurrency has increased since you acquired it, you’ll need to pay capital gains tax on the appreciation. In Canada, 50% of capital gains are taxable; however, the capital gains rate will rise from half to two-thirds on June 25, 2024, for individuals with capital gains exceeding $250,000 annually. The higher rate will apply to all capital gains for corporations and the majority of trust types.
Gifting to Qualified Donees
Gifting cryptocurrency to a registered charity or another qualified donee provides potential tax benefits. When you donate cryptocurrency to a qualified donee, you’re eligible for a charitable tax credit. You must pay capital gains tax on any profit. The capital gain is calculated as the difference between the fair market value (FMV) at the time of donation and your adjusted cost base.
The donation itself is tax-deductible. You can claim a charitable tax credit for the fair market value of the donated cryptocurrency.
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To claim this exemption, ensure that the charity is equipped to accept and properly receipt cryptocurrency donations. The donation receipt should reflect the fair market value of the crypto asset at the time of the donation.
Gifting to Family Members
When gifting cryptocurrency to family members, it’s important to note that the deemed disposition rule still applies. You’ll need to report any capital gains or losses on your tax return.
The recipient doesn’t incur any immediate tax consequences, but they will inherit your adjusted cost base. This means when they eventually sell or gift the cryptocurrency, they’ll use your original purchase price to calculate their capital gain or loss.
Attribution Rules
Be aware of the attribution rules when gifting to a spouse or minor child. If the gifted cryptocurrency generates income (e.g., through staking or lending), that income may be attributed back to you for tax purposes. However, capital gains or losses on the eventual disposition by the recipient are generally not subject to attribution.
Record-Keeping is Crucial
Maintain detailed records of all cryptocurrency transactions, including gifts. Document the following for each gift:
- Date of the gift
- Fair market value at the time of gifting
- Recipient’s information
- Your original cost basis
- Any fees associated with the transfer
These records will be essential for accurate tax reporting and potential CRA audits.
Strategic Timing
Consider the timing of your cryptocurrency gifts. If you expect the value of a particular cryptocurrency to appreciate significantly, gifting it before the appreciation could result in a lower capital gains tax liability. Conversely, if you’re sitting on losses, you might consider selling the cryptocurrency to realize the capital loss before gifting the proceeds.
Seek Professional Advice
Given the complexity of cryptocurrency taxation in Canada, it’s advisable to consult with a Canadian crypto tax lawyer before making significant crypto gifts. They can help you navigate the tax implications and develop a strategy that aligns with your financial goals.
