Were you able to take advantage of Bitcoin‘s recent price surge? Just beware though – You will have to pay taxes on your gain.
You can’t buy Bitcoin in a TFSA or an RRSP
At the end of 2020, the price of Bitcoin began to climb, initially driven by the growing appetite of investment funds and companies.
Bitcoin (BTC) has soared by more than 300% over the past year and is now trading close to US$40,000.
Analysts at JPMorgan link Bitcoin to digital gold. They have advised that a price correction is likely, but they see the price of Bitcoin hitting US$146,000 in the long term.
The surge in BTC price in recent weeks has been identified with tangible profit for many investors. Remember though that this is a capital gain and is consequently taxable. Regrettably, you cannot buy Bitcoin in a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP).
The Canada Revenue Agency (CRA) is tightening the screws on those trying to profit from the lack of oversight in cryptocurrency exchanges.
The CRA set up a unit concentrating on cryptocurrencies in 2018 and aims to strike hard very soon. In an email, the CRA says it is inquiring to ask a major Canadian cryptocurrency exchange for specific information about its clients.
In its guide on virtual currency, the CRA encourages investors to keep a record of each of their transactions.
The simplistic exchange of one cryptocurrency for another or a monetary currency is likely to create a capital gain or loss. Each transaction must be declared.
In Canada, half of the capital gain is subject to tax. Let’s say you bought $10,000 worth of Bitcoin a year ago and you sold it for $30,000. You have realized a gain of $20,000, but you need to declare half of that gain — that is, $10,000. Nevertheless, if you have endured capital losses, you can use half of them to minimize your gains.
A tax-efficient way to bet on the cryptocurrency
For meager investors who want to avoid this tax planning, a simpler answer exists to bet on Bitcoin. Blockchain stock HIVE Blockchain Technologies (TSXV:HIVE) aims to build a bridge between the blockchain industry and traditional financial markets. It owns cryptocurrency mining facilities in Canada, Iceland, and Sweden.
The latest buzz is that the company is multiplying its Bitcoin production volume. It lately procured a new generation of Bitcoin miners. HIVE is also the leading Ethereum (ETH) producer, a better-performing digital coin than Bitcoin. The cryptocurrency miner has a market cap of over $700 million.
Having this stock in a TFSA or an RRSP could cause you a lot less hassle since you won’t have to pay taxes on your capital gains. You can contribute $6,000 for 2021 if you have contributed the maximum since the TFSA’s inception in 2009. The total contribution room available in 2021 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009 is $75,500.
You could invest a portion of your TFSA in HIVE to benefit from the rise in Bitcoin price. But since this is a volatile investment, it would be more frugal to not put all your money in this one stock and to diversify in less-volatile sectors.
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