How to Report Crypto Rewards as Income to the CRA

Introduction

As cryptocurrency adoption grows, more Canadians are earning crypto rewards through activities like staking, mining, yield farming, and airdrops. While these rewards may seem like passive earnings, the Canada Revenue Agency (CRA) treats most crypto rewards as taxable income, meaning they must be reported properly to avoid penalties or reassessments.

This guide explains how crypto rewards are taxed in Canada, how to report them correctly, and what expenses may be deductible.

1. Understanding the CRA’s Guidelines on Crypto Rewards

The CRA considers most crypto rewards as income from property, meaning they are taxable at the time they are received.

Key points to remember:

• Crypto rewards are taxed as ordinary income, not as capital gains.
• The value of the rewards must be reported in Canadian dollars (CAD) at the fair market value (FMV) on the date of receipt.
• Whether rewards are considered business income or investment income depends on the nature of your crypto activity.

2. How Different Types of Crypto Rewards Are Taxed in Canada

The tax treatment of crypto rewards depends on how they were earned.

a. Staking Rewards

• Definition: Staking involves locking up crypto to support a blockchain network and receiving rewards in return.
• Tax Treatment: Staking rewards are considered income from property and must be reported as taxable income in the year they are received.

b. Mining Rewards

• Definition: Mining involves using computing power to validate transactions and earn new crypto as a reward.
• Tax Treatment:
  • If mining is a hobby, rewards are taxed as investment income.
  • If mining is a business, rewards are taxed as business income, allowing deductions for expenses like electricity and equipment.

c. Airdrops

• Definition: Airdrops occur when crypto projects distribute free tokens to wallets.
• Tax Treatment:
  • If airdrops are received without any action on your part, they are not taxable upon receipt, but they become taxable when sold.
  • If airdrops are received as part of promotional work or in exchange for services, they are immediately taxable as business income.

Failing to properly classify crypto rewards can lead to tax penalties or reassessments from the CRA.

3. Step-by-Step Guide to Reporting Crypto Rewards on Your Tax Return

Step 1: Determine the Fair Market Value (FMV) at the Time of Receipt

• Find the value of the crypto rewards in CAD using a reputable exchange like CoinGecko or Binance.
• Use the exchange rate on the day the crypto was received to determine its FMV.

Step 2: Convert Crypto Rewards to Canadian Dollars

• Since the CRA requires all income to be reported in CAD, convert the crypto value into CAD at the time of receipt.

Step 3: Report Crypto Income on Your T1 Tax Return

• For personal earnings (non-business activities): Report under “Other Income” (line 13000).
• For business-related earnings (if you mine, stake, or earn crypto rewards frequently): Report as business income (T2125 Statement of Business or Professional Activities).

Step 4: Document All Crypto Transactions

• Keep detailed records of:
  • The date the rewards were received.
  • The amount of crypto received.
  • The FMV in Canadian dollars at the time of receipt.
  • Wallet addresses and transaction IDs.
  • Any transaction fees deducted from rewards.

The CRA may audit crypto investors, so proper documentation is essential.

Step 5: Deduct Eligible Expenses (For Business Income Only)

• If crypto rewards are part of a business, certain expenses can be deducted, such as:
  • Electricity costs (for mining or staking nodes).
  • Mining equipment (depreciable assets).
  • Staking fees paid to validators.
  • Accounting and legal fees related to crypto tax compliance.

Keeping receipts and invoices is critical for claiming deductions correctly.

4. What Happens If You Don’t Report Crypto Rewards?

The CRA has increased enforcement of cryptocurrency tax compliance, and failure to report crypto rewards can result in penalties, interest charges, or audits.

Potential Consequences of Non-Compliance

• Failure-to-Report Penalty: The CRA can impose a penalty of 10% of the unreported amount if you repeatedly fail to report taxable income.
• Gross Negligence Penalty: If the CRA finds that crypto income was deliberately omitted, they may apply a 50% penalty on the unpaid tax.
• Tax Reassessments: The CRA can audit and reassess past tax years, leading to higher tax liabilities.
• Interest on Unpaid Taxes: Any unpaid taxes will accrue daily interest until fully paid.

Since the CRA obtains data from crypto exchanges and international tax agencies, crypto tax evasion is becoming riskier than ever.

5. FAQs on Reporting Crypto Rewards in Canada

Q1: Do I need to report staking rewards if I haven’t sold them?
Yes, staking rewards must be reported as income at their fair market value on the date received, even if they haven’t been sold.

Q2: Are airdrops taxable in Canada?

• If airdrops are received for free, they are not taxed at receipt, but they become taxable when sold.
• If airdrops are earned through work, referrals, or promotions, they are taxable upon receipt as business income.

Q3: Can I deduct gas fees or transaction costs when earning crypto rewards?

• Gas fees for transactions related to earning crypto cannot be deducted for personal income.
• However, if crypto rewards are part of a business, gas fees, staking fees, and operational costs may be deductible.

Q4: What if I forgot to report past crypto rewards?
If you failed to report crypto earnings in previous tax years, you may be able to correct the mistake through the CRA’s Voluntary Disclosure Program (VDP) to avoid penalties.

Conclusion

Reporting crypto rewards to the CRA is essential to remain tax compliant and avoid penalties. Since most crypto rewards are treated as taxable income, investors and businesses must:

1. Calculate and report the fair market value of rewards at the time of receipt.
2. Convert crypto earnings into CAD and report them on the correct tax form.
3. Maintain detailed transaction records to support tax filings.
4. Deduct eligible expenses if earning crypto through a business.

As the CRA intensifies its focus on crypto taxation, ensuring proper reporting and compliance is crucial. Consulting with a crypto tax professional can help investors navigate tax complexities and optimize their reporting strategy.

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.