Income Tax Implications on Staking of Cryptocurrency in Canada

  • 09 janvier 2024
  • Neti Jhatakia

The Income Tax Act (the “Act”) and the Income Tax Regulations (the “Regulations”) in Canada provide the framework for determining taxable income in Canada. Neither the Act nor the Regulations contain any specific provision or the term “staking of cryptocurrency”. However, the Act and Regulations contain provisions which determine the taxable income and, thus, it can potentially include levying tax on income from staking of cryptocurrency.

In simple terms, staking is the process of locking up cryptocurrency assets for a predetermined period to support the functioning of the blockchain. In exchange for staking, participants earn additional cryptocurrency. The network members must "stake" set amounts of cryptocurrency to validate transactions and add new blocks to the blockchain. Staking is essential as it aids in validating transactions and adding data to the blockchain.

The Ontario Securities Commission has defined the staking of cryptocurrency in a staff notice[1] as “the act of committing or locking crypto assets in smart contracts to permit the owner or the owner's agent to act as a validator for a particular proof-of-stake consensus algorithm blockchain.” The notice[2] also mentioned that the Canadian Securities Administrator’s staff are of the view that staking may involve the issuance of a security or derivative, depending on how it is conducted. It is important to note that the Ontario Securities Commission defined “staking” only for the notice which was issued for investment funds that seek to invest in crypto assets, either directly or indirectly, under National Instrument 81-102 Investment Funds (NI 81-102).

Understanding the rationale behind the possible tax implications on cryptocurrency staking is important.