Is Exchanging Crypto a Taxable Event?

I had the unfortunate experience of having to explain to a close friend that yes trading between cryptos creates what is known as taxable events.

He couldn't possibly be alone so I think it's worth setting the record straight and making it clear what the tax implications are of buying, owning, and trading cryptocurrency.

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Is Exchanging Crypto a Taxable Event?

Yes, generally speaking every time cryptocurrency is exchanged for another cryptocurrency or for fiat a taxable event is created. How the profits or losses are viewed in the eyes of the tax man depends on the type of trading that you're doing.

Here in Canada unless you're operating a business, generally buying and holding cryptocurrency and with some occasional trading will be taxable as capital gains under your personal income tax and taxed at your marginal tax rate.

Higher volume trading known as day trading may be viewed as a business which would require you to report and file your taxes as such. Under Canadian tax law an individual is required to report 50% of their gains as capital gains which will be taxable as per the law. For example if you earned earned $1,000 trading cryptocurrency you would be required to report $500 as taxable capital gains on your personal income tax filings.

What Are Crypto Taxable Events?

Any time a cryptocurrency is exchanged for another cryptocurrency or for fiat would be considered a taxable event. Every single time! I think is a shock to some as they expect that perhaps the only taxable event that is created is when you "cash out" by converting crypto back to fiat.

Unfortunately that is not the case, as all exchanging events are essentially taxable events.

Selling or gifting cryptocurrency
Trading or exchanging the cryptocurrency for another cryptocurrency
Converting cryptocurrency into fiat
Using crypto currency to buy goods

This means that every time you trade or exchange cryptocurrency it should be documented and reported on your taxes, so be sure to keep detailed records in case you are audited.

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How is Crypto Airdrop Taxed?

Ah yes, magical airdrops, everyone loves free internet money! Being blessed by an airdrop is one of the most magical of moments in crypto, but what are the tax implications?

Turns out for both the CRA and IRS receiving a crypto airdrop is counted as income! That's ordinary taxable income, however once it's exchanged for anything else it would be counted as capital gains.

Let’s say the fair market value of the SPARK at the time he receives it is $5. He will have to pay ordinary income taxes on $5,000 ($5*1,000). In addition, the amount Max reports as ordinary income becomes his basis for the new SPARK ($5,000), and he will use it to calculate capital gains/losses if/when he sells his SPARK in the future. - https://www.cointracker.io/.

Some great advise a friend once gave, "don't get cute with the CRA". Don't try to pull any tricks, not worth it. Also I'm not an expert on taxes, for the best advise speak to an accountant with crypto experience, there should be a few of them out there by now.