In good times, online traders would typically rather see their crypto profits taxed as capital gains to benefit from the 50-per-cent inclusion rate. But during crypto slumps, taxing losses as business income may be preferred.JUSTIN TALLIS/AFP/Getty Images
Clients reeling from the recent slump in the price of bitcoin are in illustrious company.
American Bitcoin Corp. ABTC-Q co-founder Eric Trump – the son of U.S. President Donald Trump – recently backed the company’s mining-and-gathering strategy despite seeing the value of his stake shrink by a reported US$600-million as shares slid more than 95 per cent from their peak in September, 2025.
The recent drop is the latest for the volatile asset after bitcoin was on a largely upward tear between mid-2022 and October, 2025, when it hit its all-time high of just more than US$125,000.
Following a steady decline, bitcoin has spent this summer hovering around half its peak value, leaving some investors to consider the possibility of a tax write-off.
The Canada Revenue Agency has issued a great deal of guidance on cryptocurrencies to taxpayers over the years, starting in 2013, when it announced transactions would be treated in the same way as those of any other commodity, leaving any profits to be treated as either capital gains or business income.
In good times, online traders would typically rather see their crypto profits taxed as capital gains to benefit from the 50-per-cent inclusion rate as opposed to business income, which is taxed in full.
But periods of crypto slumps “flip the incentive” for taxpayers, says Glen Nudelman, a partner with Toronto-based accounting firm UHY Forbes Andersen LLP.
“If someone has losses, they want them on account of income, which is 100-per-cent deductible against income from any source,” he says.
“However, the facts, not wishes, dictate if it is capital or income,” Mr. Nudelman adds.
The CRA uses a set of crypto-specific criteria to settle the issue, assessing transactions in a similar way to those involving securities. The determination is ultimately made taking into account factors such as the frequency of transactions and period of ownership as well as the financing method used by the taxpayer and their overall knowledge of crypto assets.
No single factor is determinative, according to Toronto tax lawyer David Rotfleisch of Rotfleisch & Samulovitch Professional Corp. But in general, he says that a combination of shorter hold periods and higher transaction volumes increases the chances that crypto trading activity will be considered business income.
Crystallizing losses
Regardless of how the losses are ultimately characterized, taxpayers must first crystallize them via a taxable disposition. According to the CRA’s non-exhaustive list, gifting or trading crypto assets – whether for goods, services, cash or other types of crypto asset – may be considered taxable dispositions. Conversely, transfers between wallets owned by the same person will typically not be enough to claim a tax loss.
Mr. Nudelman says crypto traders who claim a capital loss should watch out for the “superficial loss” trap, which allows the CRA to deny a deduction if the taxpayer or an affiliated person (such as a spouse or a corporation controlled by them) buys back identical property within 30 days either side of the sale and continues to own the substituted property past the end of the 30-day window post-transaction.
“Crypto traders trip this [trap] constantly,” Mr. Nudelman says. “They hold the same coin across several exchanges and wallets. Even a spouse’s separate purchase they may not know about can taint the loss.”
First Tax Court ruling on crypto
Although the transparency and security of transactions have been touted as major benefits of bitcoin and other blockchain-backed cryptocurrencies, the industry’s reputation remains tainted by incidents of fraud punctuating its history, including the US$500-million hack on the Mt. Gox exchange and the even more spectacular collapse of FTX, which cost investors billions.
Closer to home, the meltdown of Canadian exchange QuadrigaCX was at the heart of the very first Tax Court of Canada decision to address the taxation of crypto assets, released late last year.
Following the exchange’s closure in 2019, the Ontario Securities Commission concluded the collapse had occurred because of fraud and mismanagement. The taxpayer in the case was one of the victims and claimed a non-capital loss related to the disappearance of her bitcoin on the exchange, which the CRA initially denied.
The judge ultimately sided with the taxpayer, concluding that her trading activity amounted to a business and that she should be allowed to claim a non-capital loss of $473,000.
“In my view, the appellant’s activities were more than dabbling and were more akin to activities of a trader or dealer,” the judge wrote, noting the taxpayer had made regular purchases and routinely monitored the bitcoin market, as well as taking out a second mortgage, clearing out her RRSP savings and running up credit card balances to fund her efforts.
Although this decision confirmed that bitcoin losses from fraud can be deductible as a business loss in the right circumstances, Mr. Nudelman remains hungry for further guidance from the courts and the CRA.
“There are still a lot of questions in cryptocurrency taxation,” he says.