How to Declare Crypto Losses on Taxes

Introduction

Cryptocurrency investments are highly volatile, and many traders experience losses alongside gains. In Canada, properly reporting crypto losses can help reduce tax liabilities and ensure compliance with Canada Revenue Agency (CRA) regulations.

This guide explains how crypto losses are classified, how to report them, and tax-saving strategies like loss carryovers and tax-loss harvesting.

Understanding Cryptocurrency Losses

The CRA treats cryptocurrency as a commodity, meaning losses are typically categorized as capital losses unless the trading activity qualifies as a business.

Types of Crypto Losses

Capital Losses

• Occur when cryptocurrency is sold, exchanged, or disposed of for less than its Adjusted Cost Base (ACB).
• Can be used to offset capital gains and reduce overall tax liability.

Business Losses

• If trading is classified as a business, crypto losses are fully deductible against other business income.
• Business losses must be reported on Form T2125 (Statement of Business or Professional Activities).

Theft or Fraud Losses

• If crypto is stolen, lost due to exchange failures, or hacked, a loss may be claimed.
• The CRA requires substantial evidence such as police reports, exchange records, and proof of ownership.
• Each case is reviewed individually, and not all claims are approved.

Tax Treatment of Crypto Losses

Offsetting Capital Gains

• Capital losses can only offset capital gains, not regular income.
• If total capital losses exceed capital gains, the excess cannot be deducted from employment or business income.

Carrying Over Capital Losses

• Loss Carryback: Excess capital losses can be applied to capital gains from the past three years.
• Loss Carryforward: Capital losses can be carried forward indefinitely to offset future capital gains.

If a trader has no capital gains in the current tax year, carrying forward losses can be a useful tax strategy.

Steps to Declare Crypto Losses on Taxes

Record-Keeping Requirements

• The CRA requires detailed records of all crypto transactions, including:
  • Date of purchase and sale
  • Transaction amounts in CAD
  • Fair market value (FMV) at the time of each transaction
  • Trading fees, commissions, and related expenses
  • Exchange statements and blockchain transaction records

Using crypto tax software like Koinly, CoinLedger, or CoinTracker can help automate record-keeping.

Calculating Crypto Losses

1. Determine Adjusted Cost Base (ACB):
   • The ACB includes the original purchase price and transaction costs (e.g., fees, gas costs).
   • If the same cryptocurrency was purchased at different times, use the average cost method to determine ACB.
2. Calculate the Capital Loss:
   • Capital Loss = Selling Price - Adjusted Cost Base
   • If the selling price is lower than the ACB, the difference is a capital loss.

Reporting Crypto Losses to the CRA

• Capital losses are reported on Schedule 3 of the T1 tax return.
• If trading through a Canadian exchange, a T5008 Slip may be provided, simplifying reporting.
• Business losses must be reported on T2125 (for professional traders).
• For theft or fraud losses, taxpayers must provide:
  • Exchange statements showing lost assets
  • Police reports or fraud documentation
  • Correspondence with exchanges or wallet providers

Failure to provide proper documentation may result in the CRA denying the claim.

Strategies for Maximizing Crypto Loss Deductions

Tax-Loss Harvesting

• Selling underperforming crypto assets before year-end to offset capital gains from other investments.
• Be aware of the superficial loss rule, which prevents repurchasing the same asset within 30 days.

Strategic Loss Carryover

• If a trader anticipates future gains, carrying forward capital losses can reduce future tax liabilities.

Consulting a Crypto Tax Professional

• CRA crypto tax rules are complex and frequently updated.
• Seeking professional tax advice ensures full compliance and maximized deductions.

Conclusion

Declaring crypto losses in Canada can provide significant tax benefits, but it requires accurate reporting and record-keeping. By understanding capital loss rules, business loss deductions, and tax-loss harvesting, traders can optimize their tax positions and avoid penalties.

If you have any questions or require further assistance, our team at Block3 Finance can help you.

Please contact us by email at inquiry@block3finance.com or by phone at 1-877-804-1888 to schedule a FREE initial consultation appointment.

You may also visit our website (www.block3finance.com) to learn more about the range of crypto services we offer to startups, DAOs, and established businesses