Capital property vs. business income — why classification matters

Before you harvest losses, understand whether your activity is treated as capital (investment) or business (trading) income. The tax consequences differ: capital losses can be applied only to capital gains (with carry back/forward rules), while business losses can often be deducted against other income for the year. CRA guidance makes clear the correct characterization depends on factors such as frequency of trades, intention, organization, and scale — high-frequency, algorithm-driven traders or those who treat crypto trading as a commercial enterprise may be assessed as carrying on a business. If in doubt, consult a Canadian tax professional. citeturn0search6

A step‑by‑step tax‑loss harvesting playbook

Step 1 — Build a reliable ACB ledger

Start by exporting every trade, deposit and withdrawal across wallets and exchanges. Use the CRA‑accepted average cost/ACB approach for identical properties — include fees and adjust for transfers where applicable. Accurate ACB is the baseline for calculating real gains and losses. Many Canadian traders use dedicated crypto tax software to keep a continuous ACB ledger that matches CRA expectations. citeturn6search8turn6search0

Step 2 — Identify realizable losses vs paper losses

A loss only helps your tax bill once realized. Scan your holdings for positions where the current market value is below your ACB. Prioritize positions with large unrealized losses and matching realized gains in the same tax year for maximum tax benefit.

Step 3 — Execute the sale with timing in mind

Sell before December 31 if you want the loss in that tax year. For active traders, be mindful of exchange settlement conventions and confirmation times — CRA evaluates the actual disposition and the fair market value at the time of the trade when computing gains/losses. citeturn6search6

Step 4 — Avoid the superficial loss trap

If the sale would generate a capital loss, don’t repurchase the same or “identical” crypto (including via affiliated accounts) within 30 days before or after the sale, unless you want the loss denied and added to the new asset’s cost base. Workarounds traders sometimes use: (a) wait out the 31+ days, (b) switch into a materially different asset (e.g., different token or a broad‑based crypto ETF where available), or (c) realize a similar economic exposure via derivatives if you can access them in a tax‑aware manner. Each approach has tax and execution implications — check with your advisor. citeturn5search1

Step 5 — Apply losses correctly on your return

Capital losses offset capital gains. If you have a net capital loss for the year, you can carry it back three years or carry it forward indefinitely to offset future capital gains. If your activity is business income, losses are deductible against other income subject to business loss rules and limitations. Keep detailed worksheets supporting your calculations and matching trades. citeturn5search6

Step 6 — Keep exportable, exchange-level records

Closed exchanges and missing histories are a major compliance risk. Export CSVs and chain-level proofs for every exchange, and snapshot balances periodically. CRA explicitly recommends electronic record-keeping for crypto users and requires retention for at least six years. citeturn0search0

Step 7 — Reconcile, document, and, if needed, professional review

Maintain a reconciliation that ties your ACB and realized gains/losses back to exchange statements and on‑chain TXIDs. If you trade at scale, consider an annual tax review with a CPA who understands crypto accounting to reduce audit risk and confirm classification choices.

Choosing compliant exchanges and custody in Canada

Prefer exchanges and custodians that are registered with Canadian regulators and that provide full transaction histories in CAD. FINTRAC registration (as a Money Services Business or virtual currency dealer) and clear custody disclosures reduce regulatory and compliance risk. FINTRAC expects both domestic and foreign platforms that direct services to Canadians to follow MSB/FMSB rules and to report large virtual‑currency transactions above CAD 10,000. Using registered, transparent platforms simplifies year‑end reconciliation and reduces the chance of missing records if a provider exits the market. citeturn2search0

Examples of Canada‑regulated platforms that disclose FINTRAC or dealer registrations include Bitbuy (registered MSB and marketplace) and Wealthsimple’s crypto business (a registered virtual currency dealer / FINTRAC-registered entity). Choosing such platforms makes it easier to get audit-ready statements and custody proofs. citeturn3search0turn4search0

Software, automation and the role of tax professionals

At scale, manual spreadsheets break. Use reputable crypto tax tools that support Canadian ACB rules, can import exchange and wallet CSVs, and produce CRA‑friendly reports (Schedule 3-ready summaries, T2125 worksheets for business activity). Automation reduces calculation errors; professional review reduces classification risk. A qualified tax advisor can also help you plan loss harvesting across multiple years (including statutory carryback elections) and advise on the tax treatment of unusual events (stolen or permanently inaccessible assets, exchange insolvency recoveries, etc.). citeturn0search0