Canada - Airdrops

[nskschatten]

Hi there,
first year doing crytpo taxes and it has been fun …

Hope you can help me make sense of this.

Airdrops:
It seems that airdrops are treated as income. So for example, if I get CoinX airdropped on March 1st 2021. it might have a value of 1 CAD. However the coin is performing really bad and is not surviving the bear market it goes to zero on April 1st 2021.
If I understand the rules correctly the Airdrop itself for 1 CAD is treated as INCOME and 100% is taxable according to my tax bracket. Now I generated a loss of 1 CAD on April 1st which is treated as capital loss. Only 50% is taxable, which means I can get 50% off the taxes back. In the end I paid taxes for something worthless.

Is this correct interpretation? airdrops are sometimes out of the users control and are just sent to addresses. Also prices sometimes are high in anticipation of an airdrop and then rapidly drop in value with the supply shock, etc.

Second question:
It seems that that Loan Interest, flexible savings and Staking rewards are all treated as Income and therefore 100% taxable. Where as my banks savings account generated interest would be treated as capital gains (50%). Is this a correct understanding or is it a grey area and you can treat it either so or so?

Thanks a lot
Best
nsk

[Mark_DesLauriers]

These are good questions.

Airdrops

I would be interested to know where you received the advice that the value of airdropped tokens is treated as taxable income in Canada. AFAIK CRA has not provided any specific guidance on airdrops. Here is the relevant excerpted advice from Koinly’s Canadian tax guide (with which I agree):

How are airdrops and forks taxed in Canada?

The CRA has no specific guidance on how airdrops and forks are taxed in Canada - but we can infer their tax treatment from their guidance on what is considered business income. Forks and airdrops are unlikely to be taxed as income on receipt, but you will pay Capital Gains Tax when you later sell coins or tokens you received from an airdrop or hard fork.

Receiving an airdrop

The Canada Revenue Agency is unlikely to view airdrops as a type of income, as long as you’re seen to be trading as an individual and not as a business.

However, you will pay tax when you later spend, swap, gift or sell coins or tokens received from an airdrop.

TAX FREE

If you haven’t provided a service to earn an airdrop then it is really just a gift of the airdropped tokens. In Canada, recipients of gifts are not taxed on the value of the gifts when received.

However, if the gifted asset, say a painting, has increased in value from the date you received it, then you are taxed on the gain as a taxable gain.

Interest

You are correct that loan Interest, flexible savings and staking rewards should all be treated as being earned on income account and, as such, are fully taxable based on your personal tax rate. Any interest generated in a bank savings account is also fully taxable as a receipt on income account, i.e. it is not subject to capital gains treatment. Your Canadian bank should be sending you a T5 slip with an amount in Box 13 for “Interest from Canadian Sources”.

Hope this helps.

[nskschatten]

Hello Mark,

Thank you very much for the very valuable insight. What I wrote are my interpretations of the koinly software and I might be wrong and most likely are after reading your answer. Currently under the standard settings for Canada, the airdrops are marked as income and a cost basis is applied. But I think I need to change the settings so it doesnt apply to income anymore.

What I got out of your response is:

• Airdrops are tax free. Cost Basis is fair value or 0? If gifts are tax free then the cost basis should be the market value of that day, right? only gains from changes to market value should than be subject to capital gains tax. Right? So in my example, if I receive 1 BTC airdrop for 50,000 CAD value on that day, that 1 BTC is tax free. Assuming BTC goes up to 60,000 CAD and I sell, only the difference (i.e. 10,000 CAD) would be subject to capital gains tax. Did I get it correctly?
• any other interest generated (flexible savings, loan interest or staking rewards) would be treated as income and is subject to regular income tax

And you are right regarding the T5. I assumed it’s capital gains tax but it’s not. I always enter the T5 slip values into TurboTax without giving it further thoughts.

Do you know how the following should be handled?

• Crypto bonus for CEX for sign-ups or for fulfilling conditions. For example hold BTC for 30 days to get a gift of 10$ in BTC. That 10$ in BTC how would that be taxed?
• Cash sign-up bonus for CEX. For example deposit 100 CAD to gain a 25 CAD cash bonus.
• Crypto gifts to my wife. I send some of my own crypto to my wife’s Celsius (Lending Platform) account. That transaction is currently taxed under koinly as it is a “Withdrawal”. It’s a small amount so does not matter really but it triggered a 15 CAD capital gains transaction
• I lent some crypto to my wife for the purpose of gaining some rewards (deposit 250 USDC and hold for 30 days for a 10 USD BTC bonus). She returned that 250 USDC to me. At the moment the software treats this as deposit and withdrawal transaction as it doesnt know better. But is that correct?

Thanks so much in advance.
Best
nsk

[Mark_DesLauriers]

Glad you found my reply helpful. I have tried to address your follow-up questions in BOLD in the excerpts from your latest post below:

What I got out of your response is:

• Airdrops are tax free. Yes, if you receive them gratuitously without providing any service to earn the airdrop.
  Cost Basis is fair value or 0? In their Canadian tax guide Koinly seems to advise that the cost basis of airdropped crypto gifts is $0 such that all future value realized on ultimate disposition is subject to capital gains tax. However, elsewhere in the guide they say that the cost basis of crypto received as a gift is the fair market value at time of receipt. I prefer this approach so I have been leaving airdrops as Deposits and letting Koinly value them if there is a quoted market price. If there is no available market price then you may have to value the gifted tokens manually to set your cost basis.
  If gifts are tax free then the cost basis should be the market value of that day, right? Only gains from changes to market value should then be subject to capital gains tax. Right? I believe this is the correct approach absent specific guidance to the contrary from CRA. So in my example, if I receive 1 BTC airdrop for 50,000 CAD value on that day, that 1 BTC is tax free. Assuming BTC goes up to 60,000 CAD and I sell, only the difference (i.e. 10,000 CAD) would be subject to capital gains tax. Did I get it correctly? Yes, as mentioned above I think this is the correct approach. Taxable capital gain is 50% of the capital gain.
• any other interest generated (flexible savings, loan interest or staking rewards) would be treated as income and is subject to regular income tax. Yes, I think this is generally correct. There could be some situations where returns on amounts invested in liquidity pool arrangements are considered capital gains transactions, e.g. where there is no fixed or agreed APR. This is a complex area that would be very fact dependent.

Do you know how the following should be handled?

• Crypto bonus for CEX for sign-ups or for fulfilling conditions. For example hold BTC for 30 days to get a gift of 10$ in BTC. That 10$ in BTC how would that be taxed? I don’t think the gift is taxed but the BTC will be subject to capital gains tax on disposal as discussed above with airdrop gifts.

• Cash sign-up bonus for CEX. For example deposit 100 CAD to gain a 25 CAD cash bonus. Same as above except there is no capital gains tax on disposal of Canadian fiat by a Canadian resident.

• Crypto gifts to my wife. I send some of my own crypto to my wife’s Celsius (Lending Platform) account. That transaction is currently taxed under Koinly as it is a “Withdrawal”. It’s a small amount so does not matter really but it triggered a 15 CAD capital gains transaction. Gifts of property to spouses and other family members can be a complicated subject. Generally a gift of property such as crypto is deemed to be a disposition of the crypto at fair market value unless a rollover is available. Given that you are dealing with small amounts I would just let Koinly treat the withdrawals as being subject to capital gains treatment. If you are confident that a rollover is available in the circumstances, you can tag the withdrawal as a “Gift” and Koinly will not subject the disposal to capital gains treatment.

• I lent some crypto to my wife for the purpose of gaining some rewards (deposit 250 USDC and hold for 30 days for a 10 USD BTC bonus). She returned that 250 USDC to me. At the moment the software treats this as deposit and withdrawal transaction as it doesn’t know better. But is that correct? I don’t know how non-interest bearing loans of crypto to a family member should be treated under Canadian tax law. There are rules applicable to spousal loans that could attribute any gains she realizes back to you. Personally, if it is small $ I would treat the transaction as a gift that is regifted and let capital gains tax apply.

[nskschatten]

Hi Mark,
I just returned from vacation and I just read your message. Thank you so much for the information. This is really helpful.

I think I am almost done with my crypto taxes. Based on your feedback, I setup the settings like this:

Is this correct?

I have one more unrelated question as you seem very knowledgeable in Canadian tax. I googled but couldnt find a clear answer. 10 years ago I setup two annuity policies in Germany. After a while I moved to Canada as PR and kept those contracts running. In 2021 I terminated them and got a refund for the capital minus a surrender charge. What I did is calculated the cost basis on an annual basis (monthly payments with an annual avg CAD-EUR rate) and compared that against the payout I received. I incurred a capital loss, especially with the surrender charge in CAD. Do you know how I can claim this loss? Regular “Capital Gain Loss”? Would that be a Bond or more like a Stock? or is there a special section I would need to claim it? Should the surrender Fee displayed separately or just mingled into the proceeds amount?

Thanks so much.
Best
nskschatten

[Mark_DesLauriers]

Hi there, Yes, I think you have your Settings set up correctly based on the advice that Koinly provides in its Canadian Tax Guide 2022 with respect to Airdrops and Forks as discussed in my earlier replies.

Unfortunately I am not very familiar with the taxation of life insurance poilicies and annuity contracts. It is my limited understanding that cancellation of an insurance policy or annuity contract gives rise to income tax rather than capital gains treatment. As such, any gain in excess of ACB is taxable as income and any loss is not deductible. I suggest you contact a tax expert in this area as my understanding may be entirey incorrect.