Crypto taxation in Canada can be confusing. In this article, we will explain how crypto staking works with Canadian taxes.
The first thing you need to know is that there is a difference between how some coins have their transactions validated on the blockchain. There are proof or work coins and there are proof of stake coins.
Bitcoin is a proof of work coin. Miners solve computational puzzles and the miner that solves the first puzzle first gets to add the next block of transactions to the blockchain. Proof of work coins cannot be staked.
Proof of stake coins on the other hand work differently. There are no miners. Instead, there are validators, and anyone can run a validator node if they hold enough of the coin. The larger your stake the more likely you will be rewarded. This benefits those who are most invested. Examples of proof of stake coins include Cardano, Polkadot and Avalanche.
Staking is easy to do. You do not need any special equipment. Simply, find a crypto exchange that offers staking for the coin you wish to stake, and follow the steps. You will receive anywhere between 4%-15% in annual rewards on your stake, depending on the coin.
Usually, you will need to lock up your crypto for a period of time, usually three months. Some platforms will offer shorter lock up periods but you won’t receive as many rewards.
How Does Staking Work with Taxes?
There is no official guidance on crypto staking from the Canada Revenue Agency, but some people suggest staking should be treated the same as mining.
Since they are two different processes but provide the same function (adding block to a blockchain) it’s easy to see why they should be considered the same for tax purposes.
If you mine bitcoin or other PoW coins as a hobby, then you only pay capital gains tax when you sell the rewards. The cost basis is zero because you don’t pay anything for them. If you are mining as a business, e.g. you run a mining farm, then rewards received would be taxes as business income. You would still have to pay capital gains tax when you sell.
Therefore, staking for the average investor would be considered a hobby and you would only pay capital gains tax when you sell your rewards.
On the other hand, Koinly suggests that crypto staking should be treated as income.
Koinly is a crypto tax software that can help you complete your crypto taxes easily. The software will import all of your transactions, label them, and calculate your total income and capital gains.
Koinly notes in its tax guide for Canadians that staking is likely to be treated as income by the CRA because you are “earning” it.
You should therefore keep track of the dollar value of each crypto reward received and add the total for the year to your income.
Additionally, you will have to pay capital gains tax when you sell, swap or gift your staking rewards. The cost basis should be the dollar amount when you received the reward.
Staking can therefore incur two types of tax – income tax and capital gains tax.
Koinly, which is free to start using, can calculate everything for you.
Although there is no official word from the CRA about staking, to be conservative, we suggest following Koinly’s guidance and treating your staking rewards as income.
You can also refer to our previous crypto tax articles for more information on completing your crypto taxes in Canada.