Get Started With Bitcoin Investing In Canada

Bitcoin is a cryptocurrency that has soared in value since its creation in 2009, with some investors becoming overnight millionaires. However, it is a highly volatile asset, and its value can fluctuate wildly. As such, investing in Bitcoin is risky, and it's important to do your research before getting started. In this article, we'll cover everything you need to know about how to start investing in Bitcoin in Canada, including the different ways to buy and store Bitcoin, the risks involved, and the tax implications.

Choosing a Bitcoin Exchange

When choosing a Bitcoin exchange, it's important to do your research and select one that suits your needs. Here are some key factors to consider:

• Level of experience: If you're new to the world of cryptocurrency, opt for a fiat-to-crypto exchange that caters to beginners. Wealthsimple, for instance, offers advice for investors at all levels.
• Currency options: Determine the type of currency you plan to use to purchase Bitcoin. Some exchanges may offer more flexibility than others in terms of accepted currencies.
• Security and reputation: Given the prevalence of security threats and hacking attempts in the cryptocurrency industry, it's crucial to choose an exchange that takes security seriously. Look for exchanges that adhere to anti-money laundering and counter-terrorism financing regulations and perform 'Know Your Customer' checks. Additionally, ensure the exchange has a good reputation and is trustworthy.
• Fees and charges: Different exchanges have varying fee structures. Some may charge higher fees for certain payment methods, while others may offer lower trading fees. It's important to understand the fee structure before committing to an exchange.
• Features and functionality: Consider the features and functionality offered by the exchange. For example, some exchanges may provide advanced charting and order types for more sophisticated traders, while others may offer instant trades and real-time quotes.
• Regulation and compliance: To comply with Canadian regulations, choose an exchange that adheres to the rules set by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Additionally, check if the exchange is registered as a Money Service Business, as this provides an extra layer of security.
• Customer support: Opt for an exchange that offers reliable customer support. This can be crucial if you encounter any issues or have questions during the trading process.

Some popular Bitcoin exchanges in Canada include CoinSmart (now Bitbuy), Wealthsimple Crypto, NDAX, VirgoCX, Crypto.com, and Coinbase. Each exchange has its own unique features, fees, and security measures, so be sure to review them before making a decision.

How to Purchase Bitcoin Anonymously

While it is possible to purchase Bitcoin anonymously, it is becoming increasingly difficult due to regulatory changes and Know Your Customer (KYC) requirements. Here are some methods to buy and store Bitcoin while maintaining anonymity:

• Peer-to-peer (P2P) platforms: P2P platforms like Hodl Hodl and Bisq allow users to buy and sell Bitcoin directly with each other without the need for KYC verification.
• Bitcoin ATMs: Using a Bitcoin ATM is a convenient way to buy Bitcoin anonymously, as they sometimes don't require ID and can accept cash payments. However, they may have limits on the amount of Bitcoin that can be purchased, and typically charge high fees.
• Decentralized exchanges (DEXs): DEXs such as Uniswap, 0x Protocol, and Thorchain allow users to trade Bitcoin without a centralized authority, meaning no KYC verification is required. However, they may have limited liquidity compared to centralized exchanges.
• Privacy-focused wallets and exchanges: Some wallets and exchanges, like Wasabi and Samourai, offer privacy-enhancing features such as coin mixing and Tor integration to help obfuscate transaction trails on the blockchain.
• Prepaid cards: Using prepaid credit or debit cards that are not linked to your personal information can be a way to buy Bitcoin anonymously. However, you will need to find cards that can be used without KYC checks and are accepted by the seller or exchange.

It is important to note that while these methods can enhance anonymity, they may also come with higher fees, limited functionality, and increased risk of scams or fraud. Additionally, while Bitcoin transactions themselves are pseudonymous, other actions such as signing up for an exchange or wallet may require personal information, compromising anonymity.

Bitcoin Wallets

There are two main types of wallets: custodial and non-custodial. Custodial wallets (also called online wallets) are hosted by a third party that stores your keys for you. Non-custodial wallets are wallets in which you take responsibility for securing your keys. This is the type that most cryptocurrency wallets on devices are.

There are two subcategories of wallets: hot and cold. A hot wallet has a connection to the internet or to a device that has a connection, and a cold wallet has no connection. Lastly, there are three subcategories of wallets—software, hardware, and paper. Each of these types is considered either a hot or cold wallet.

So, you can have a non-custodial software hot wallet, a non-custodial hardware cold or hot wallet, or a custodial hardware cold wallet. These are the most common types, but you may also encounter other combinations.

Software wallets include applications for desktops and mobile devices. They are installed on a desktop or laptop computer and can access your cryptocurrency, make transactions, display your balance, and much more. Many software wallets also include additional functionality, such as exchange integration if you're using a wallet designed by a cryptocurrency exchange.

Hardware wallets are the most popular type of wallet because you can store your private keys and remove them from your device. These devices might resemble a USB drive, and modern hardware wallets have several features. You can make a cryptocurrency transaction on your computer or device by plugging in the hardware wallet. Most of them can sign cryptocurrency transactions automatically without requiring you to enter the key, circumventing a hacker's ability to log your keypresses or record your screen.

Paper wallets are an offline method for storing cryptocurrency. Early crypto users would write or type their keys on paper, which they called paper wallets. These evolved to include the keys and QR codes so that wallets on mobile devices could scan them. However, paper wallets are easily damaged or lost, so many crypto owners do not use them anymore.

When picking out a bitcoin wallet, make sure that you consider backup and security features.

Cashing Out Bitcoin

There are several ways to convert bitcoin to cash and ultimately move it to a bank account. Here are some of the most popular methods:

• Sell bitcoin on a cryptocurrency exchange: This is the easiest method if you want to sell bitcoin and withdraw the resulting cash directly to a bank account. Examples of such exchanges include Coinbase, Binance, Gemini, and Kraken.
• Use a crypto debit card: Several websites allow you to sell bitcoin and receive a prepaid debit card in exchange, which can be used like a regular debit card. The BitPay Card is one of the top crypto cards for U.S. residents.
• Bitcoin ATMs: Bitcoin ATMs are physical centres that allow you to buy or sell bitcoins with fiat money. As of 2022, there were over 4990+ crypto ATMs across 76 countries. However, this method is usually only suitable for small transactions due to deposit and withdrawal limits, and the transaction fees are typically high.
• Peer-to-peer transactions: For a quicker, more anonymous method, you can use a peer-to-peer platform like LocalBitcoins to sell bitcoin for cash. When selling bitcoins to other people, you can decide which payment method you want the buyers to use, such as a cash deposit or bank transfer.

When deciding how to cash out your bitcoin, there are several things to consider, including the cost and ease of the cash-out method, where you want the money deposited, the type of currency you need, and how long you are willing to wait to receive the cash.

Bitcoin Taxation in Canada

The Canada Revenue Agency (CRA) considers cryptocurrency transactions taxable events. Crypto is treated similarly to commodities for tax purposes. Consequently, any income or capital gain derived from crypto transactions must be reported by those required to file a tax return in Canada and will normally be subject to Canadian crypto tax laws. Fifty percent of your capital gains is taxable in Canada. Taxpayers must report their capital gains or losses using a Schedule 3 as part of their annual returns.

If the CRA determines that your crypto activities constitute a crypto business, you are not allowed to claim your crypto gains as capital gains but must report the income as business income, which is 100% taxable.

Crypto mining in Canada can also be considered a business activity. If the CRA sees your crypto mining activities as such, any income derived from mining crypto must be reported as business income. Canadian crypto miners can also deduct related expenses. However, if you mine occasionally, the CRA might treat your crypto gains as servicing, or as a taxable capital gain.

In Canada, if you incur losses from your cryptocurrency transactions, these can offset capital gains of the same nature. These capital losses can be carried back or carried forward to offset future capital gains, providing relief in crypto tax obligations.

The CRA expects Canadians to maintain detailed records of their crypto transactions to accurately report and pay any taxes owed.

Frequently asked questions