A Beginner's Guide To Crypto Investing In Canada

Cryptocurrency is a virtual asset that uses cryptography to protect and verify transactions, which are typically recorded on a blockchain. In Canada, it is legal to buy and sell cryptocurrency, but it is not considered legal tender. If you're thinking about investing in cryptocurrency in Canada, there are a few things you should know. First, cryptocurrency is a highly volatile and speculative investment, so it's only suitable for people with a high tolerance for risk. It's important to do your research before investing and to be aware of the risks involved, including market volatility, the increased risk of theft, market manipulation, and the lack of regulation. Another thing to keep in mind is that cryptocurrency transactions often have tax implications, so it's important to keep accurate records and report any gains or losses on your income tax return. When you're ready to invest, you can use a crypto exchange or trading platform to buy and sell cryptocurrency, and there are many reputable options available in Canada, including Bitbuy, Wealthsimple Crypto, and Binance.

Crypto wallets and security

A cryptocurrency wallet is a software or hardware tool that allows users to store, manage, and transact their digital assets. Crypto wallets are pivotal in securely storing, sending, and receiving cryptocurrencies, acting as a bridge between the decentralised blockchain technology and users' financial activities.

When you create a wallet, two keys are generated: a private one and a public one. The wallet stores your keys and enables you to sign transactions, generate new addresses, initiate transfers, track portfolio balances, manage your crypto, and interact with dApps.

Types of Crypto Wallets

Software Wallets

• Hot Wallets: Connected to the internet, hot wallets are convenient for frequent transactions but are more susceptible to hacking. Examples include web-based, mobile, and desktop wallets.
• Cold Wallets: Offline wallets, like hardware wallets, provide enhanced security by keeping private keys offline. They are ideal for long-term storage.

Hardware Wallets

These physical devices resemble USB drives and offer strong security by keeping the private keys offline. Users can connect hardware wallets to computers or mobile devices only when necessary.

Paper Wallets

A paper wallet involves printing or writing down the private and public keys on a piece of paper. While this is a cold storage method, it requires careful handling to prevent loss or damage.

Online Wallets

Also known as web wallets, these are hosted on the internet and can be accessed through browsers. While convenient, they are less secure due to their susceptibility to online threats.

Security Considerations

Private Key Protection

Safeguard your private keys from unauthorised access. Hardware wallets and cold storage methods are recommended for optimal protection.

Two-Factor Authentication (2FA)

Enable 2FA wherever possible to add an extra layer of security to your wallet.

Regular Updates

Keep your wallet software updated to benefit from the latest security patches and improvements.

Beware of Phishing

Be cautious of phishing attempts that aim to trick you into revealing your private keys or login credentials.

Backup Your Wallet

Regularly back up your wallet data to prevent loss in case of device failure or loss.

Best Practices for Securing Your Crypto Wallet

• Cold Storage for Savings: Cold storage gives you absolute control over your funds, reducing the risk of phishing and other online attacks.
• Multisig Wallets for Treasury: Multi-signature wallets are better options for DAOs and larger groups, requiring signatures from multiple people to approve transactions.
• Use 2FA Authentication: Two-factor authentication prevents unauthorised access to your wallet.
• Have Multiple Wallets: Diversifying your crypto across multiple wallets reduces the degree of loss in case of a breach.
• Be Careful with Public Wi-Fi: Avoid accessing your wallet on public Wi-Fi, as it may compromise your sensitive data.
• Be Wary of Phishing: Familiarise yourself with phishing tactics and be cautious when sharing information.
• Use Strong and Unpredictable Passwords: Set up a complex password for your wallet, avoiding personal information.
• Keep Your Seed Phrase and Passwords Safe: Store your seed phrase and passwords offline, such as writing them down and keeping them in a secure location.
• Only Interact with Secure Websites: Ensure websites have HTTPS and avoid saving your wallet as a browser extension or saving passwords in your browser.
• Use Burner Wallets for Airdrop: Use separate burner addresses for airdrops to minimise the risk of connecting your main wallet to unsafe websites.

Tax implications

In Canada, cryptocurrency is treated as property, and gains from it are taxed as business income or capital gains. The Canada Revenue Agency (CRA) considers cryptocurrency transactions to be taxable events, and the tax treatment depends on whether the transactions are considered part of a business or capital gains. While 50% of capital gains are taxable, 100% of business income is taxable. Therefore, determining whether crypto gains are considered capital gains or business income is crucial.

When you sell or trade cryptocurrency, it is considered a taxable event, and the profit is subject to taxation. The profit earned from the sale or trade of cryptocurrency is treated as either capital gains or business income and must be reported on your income tax return. It is important to maintain accurate records of your cryptocurrency transactions to ensure correct reporting.

The CRA considers various factors to determine if crypto-asset transactions are classified as business income or capital gains. These factors include the frequency of transactions, the period of ownership, the taxpayer's knowledge of the crypto-asset market, the time spent studying the market, financing, and advertising. If the factors indicate that the taxpayer is carrying on a business, the crypto-asset transactions will be taxed as business income. Otherwise, they will be taxed as capital gains.

Additionally, when cryptocurrency is used to pay for goods and services, it is treated as a barter transaction for income tax purposes. The taxpayer is considered to have disposed of the cryptocurrency, and the resulting gain or loss is treated as business income or a capital gain. The vendor must include the value of the goods or services provided or the value of the cryptocurrency accepted as payment, whichever is more readily valued.

The CRA also provides guidance on valuing cryptocurrency for tax purposes. Taxpayers must use a reasonable method to determine the value of their crypto-assets, even when a direct value is not readily available. The CRA generally accepts the fair market value of the crypto-asset for tax reporting purposes.

To summarise, investing in cryptocurrency in Canada can have significant tax implications. The profits from cryptocurrency transactions are taxed as business income or capital gains, depending on the specific circumstances. It is important to carefully consider these tax implications and consult with tax professionals to ensure compliance with CRA regulations.

Choosing a crypto exchange

There are hundreds of crypto exchanges to choose from, each with different features and benefits. Here are some key factors to consider when choosing a crypto exchange:

• Supported countries: Ensure that the exchange operates in Canada.
• Supported coins: Verify that the exchange supports the cryptocurrencies you want to trade, such as Bitcoin and Ethereum.
• Prices and fees: Compare the fees charged by different exchanges, as they can vary significantly. Some exchanges charge higher fees for added convenience, which may be worth it for beginners.
• Security and reliability: Research the security features of the exchange and whether it has been successfully hacked in the past.
• Extra features: Some exchanges offer additional features like crypto-backed credit cards, crypto rewards programs, and NFT trading.
• Regulatory compliance: Check if the exchange is compliant with relevant regulations and approved by organizations such as the Ontario Securities Commission and the Canadian Securities Administrators.
• User-friendliness: Consider the ease of use and interface of the exchange, especially if you are a beginner.
• Volume discounts: Look for exchanges that offer volume discounts on fees for frequent trading.
• Advanced trading features: If you are an advanced trader, look for exchanges that offer features like margin trading, futures trading, and advanced order types.
• Customer service: Evaluate the availability and responsiveness of customer support.
• Withdrawal fees: Review the withdrawal fees charged by the exchange, especially if you plan to move your crypto holdings off the exchange.

Some popular crypto exchanges in Canada include Bitbuy, Crypto.com, Coinbase, KuCoin, and Gemini. It is important to thoroughly research and compare different exchanges before making a decision.

Payment methods

There are several payment methods available to Canadians looking to invest in cryptocurrencies. The most common method is to use a credit or debit card. Many platforms accept card payments, and this is often the quickest and most convenient option. However, it is important to note that card payments may come with higher fees. For example, if you fund your crypto exchange account with a credit card, the transfer fees can be high, whereas a wire transfer may take a few days but will likely result in a lower fee.

Another option is to use a bank transfer or wire transfer. This method allows you to transfer funds directly from your bank account to the crypto exchange or trading platform. While this can be a secure way to fund your account, it may take longer for the funds to become available, and there may still be associated fees.

Some platforms also accept payments via PayPal or even gift cards. It is important to check the fees and processing times for each payment method, as these can vary. For instance, Interac e-transfers are supported by some platforms and may offer a faster and more cost-effective way to fund your account.

Additionally, some platforms may support the use of prepaid cards or even allow you to trade using other cryptocurrencies. It is always a good idea to review the payment methods accepted by a platform before signing up, to ensure they align with your preferences and requirements.

It is worth noting that some payment methods may not be available for withdrawals, so it is important to understand the specifics of each platform's policies.

Crypto trading platforms

• Bitbuy: One of the biggest Canadian-based exchanges. It has a seamless, sleek user experience, quality customer support, and a 95% cold storage policy to protect crypto from potential hacks. It has high fees compared to other platforms.
• CoinSmart: A beginner-friendly Canadian-based exchange founded in 2018. It uses two-factor authentication to protect customer funds and offers cold storage for added protection. It has relatively low fees, with most transactions taxed between 0.2% and 0.3%.
• Coinbase: One of the biggest and most trusted crypto exchanges in the world, offering more than 200 cryptocurrencies. It has a fantastic user interface and is a great choice for beginners. However, it has relatively high fees and has been criticised for being slow to respond to support requests.
• Kraken: One of the oldest crypto exchanges in the world, founded in 2011. It offers low fees, ranging from 0% to 0.4%, and advanced trading tools. It is trusted by customers worldwide and provides strong security practices, such as two-factor authentication.
• Wealthsimple: A Toronto-based platform founded in 2014, originally as a robo-advisor platform. It expanded to offer crypto trading and has a user-friendly interface. However, it has relatively high fees, ranging from 0.5% to 2%.
• NDAX: A Calgary-based exchange founded in 2018, offering low fees, a friendly user interface, and strong security measures. It has a flat fee of 0.2% on cryptocurrency trades.
• Crypto.com: A Hong Kong-based exchange serving customers worldwide, offering access to more than 350 cryptocurrencies. It provides interest rewards of up to 10% on stable coins and prepaid cards with up to 5% cashback. However, it has been criticised for lacklustre customer support and mobile app glitches.

When choosing a crypto trading platform, it is essential to consider factors such as fees, user interface, reputation, security, and the range of cryptocurrencies offered.

Frequently asked questions