When Haman Mamdouhi made $2,500 in profit from a $5,000 investment in Bitcoin last month, the tax implications weren't exactly top of mind.
“Taxing is probably the last thing on anyone’s mind,” said Mamdouhi, who is in his early 20s and started investing casually in high school.
“The first thing is “oh, is Bitcoin something I should just get into, what’s going on?”
However, the Toronto-based entrepreneur says first-time investors should carefully consider the kind of money they’ll have to pay in taxes, and how they can deduct expenses to maximize the money they keep.
With a recent surge in the value of Bitcoin, and massive profits for some traders from the rapid rise (and subsequent fall) of GameStop shares, tax specialists say there are multiple ways that new traders can declare their income and expense the related costs.
In Mamdouhi’s case, he said he can expense interest payments associated with a line of credit that he opened to further invest in Bitcoin. He said Quebec also allows people who mine Bitcoin to expense the computer equipment needed to do so, which can cost around $20,000.
Lisa Gittens, a tax expert with H&R Block, said the first step in filing taxes for new traders is to figure out whether they're investing over the long term, or if they’re buying and selling their shares in a matter of days.
Long term investments that span the course of months or years are generally treated as capital gains, meaning that only 50 per cent of a person’s profits will be taxed.
But if a person is buying and selling stocks in a short time-frame, like in the case of those who benefited from GameStop’s dramatic rise to over USD$460 per share in a matter of weeks, the profits would generally be considered business income, and 100 per cent of the profits would go towards your personal income tax bracket.
That means that in Ontario, an investor could expect to pay back at least 20 per cent of their profits in taxes if they were in the lowest tax bracket.
But Gittens said there could be exceptions if this was your first time dabbling in day trading.
“If it’s a one off thing that you just did this investment to try it, and you get a T-slip in the mail, you’d be reporting it … as investment income,” said Gittens.
“But if you look at this and you like it, and continue to (trade stocks), you’ll be reporting it as business income.”
For people looking to dive into day trading as a source of income, Gittens says the tax code gives Canadians opportunities to shelter their income in a registered retirement savings plan (RRSP) or a tax-free savings account (TSFA).
But she said the Canada Revenue Agency can deny the shelter to your profits in either type of account based on how actively you trade within them.
Day-traders also have multiple options when it comes to filing for expenses related to their work.
Gittens said people can deduct the cost of trading fees, management fees paid to stock brokers, or fees related to courses and registration with provincial securities commissions.
“It’s wonderful to know how to report income, but take advantage of our tax system that allows deductions and credits before you determine your liability,” said Gittens. “Claim the deductions and credits that you’re entitled to, so you can reduce the tax that you have owing on any type of investment.”
Gittens pointed out the onus is on traders and investors to keep track of their investments and the profits and losses from every transaction they make. She suggested keeping a spreadsheet or using an app to track their trades.
In the complicated and sometimes informal world of Bitcoin and other cryptocurrencies, that’s already proving to be a headache for Mamdouhi.
“Given that each transaction is a taxable event, and that you might be doing multiple transactions between (cryptocurrencies) throughout the day, it becomes almost unfeasible to even be able to do your taxes properly,” said Mamdouhi.
“Already, I’m at least three days behind.”
This report by The Canadian Press was first published Feb. 9, 2021.
Salmaan Farooqui, The Canadian Press
Note to readers: This is a corrected story. A previous version incorrectly stated that day trading profits were tax exempt within an RRSP.