Crypto Capital Gains, Business Income and AMT

The Alternative Minimum Tax (AMT) is an income tax calculation that can result in an unexpected crypto tax bill.

The AMT rules apply a flat tax rate to income exceeding a certain threshold, which may result in a highertax liability than would be payable under the regular rules. The Alternative Minimum Tax (AMT) is an income tax calculation that can result in an unexpected tax bill for the unwary. The AMT rules apply a flat tax rate to income exceeding a certain threshold, which may result in a higher tax liability than would be payable under the regular rules.

If you’re reading this article, it means that you are trying to learn more about your tax responsibilities and you’re considering your options in reducing your tax burden by doing some tax planning. This article is a general overview and should never replace consulting with a tax professional about your own and unique tax situation.

The Basics

Under the regular tax calculation, taxable income is calculated using deductions, exemptions and credits that are likely familiar to you. For example, 50% of capital gains are not taxed, and the federal donation tax credit could reduce federal tax by up to 33% (for the highest income-earners) of the amount of charitable donations.

What is the AMT?

In Canada, the Alternative Minimum Tax (AMT) is a separate tax calculation that applies to certain high-income individuals. It’s designed to ensure that well-off taxpayers with substantial income pay a minimum level of tax, even if they have deductions or credits that would otherwise reduce their regular tax liability.

In arriving to the AMT, first, we need to consider whether your crypto trading activities are classified as business income or capital gains. The Canada Revenue Agency (CRA) has rules to what is Capital Gains or Business Income. The amount of taxes due will be the higher amount from the aforementioned two calculations.

Adjusted taxable income

Under the AMT system, taxable income is calculated using only deductions, exemptions and credits that are permitted for AMT purposes – which are different from regular capital gain calculations, as will be discussed in the example table below. This amount of taxable income under the AMT system is referred to as “adjusted taxable income.”

Who is Affected under AMT?

The AMT applies to individuals, corporations, and trusts and attempt to reduce aggressive tax planning. For individuals, it primarily affects those with substantial income and certain tax preferences (such as capital gains, stock options, dividends)

What is the Difference between Capital Gains and AMT?

Both Capital Gains (also known as regular capital tax in this article) and AMT are two different calculations.  The purpose is to prevent excessive tax planning by high income taxpayers when calculating capital gains for tax purposes.

Under the current AMT regime for 2023 taxation year, 80% of capital gains are taxable for AMT purposes and an AMT rate of 15%. However, starting in 2024, the proposed AMT regime will increase the capital gains inclusion rate to 100%. This means that all capital gains will be fully taxable for AMT purposes. The top AMT rate applying to capital gains will be 20.5% in 2024, nearly 25% higher than the regular federal rate.

Alternative Minimum Tax (AMT) Carryforward

When a taxpayer pays AMT, there exists an opportunity for recovery, provided they have adequate taxable income in subsequent years. Taxpayers can typically claim a credit against federal income tax equivalent to their available AMT carryforward amount. These amounts can be applied to offset federal income tax liabilities within any of the seven years following the year in which the AMT was paid. Any unused amounts will expire at the conclusion of the applicable seven-year period. In other words, it means that in many cases, AMT can be viewed as a prepayment of future taxes rather than an additional burden.

Example:

Investor realizing significant gains from selling crypto assets

John's only income comes from the sale of crypto assets held in a non-registered account with a fair market value (FMV) of $600,000 and an adjusted cost base (ACB) of $150,000, yielding a capital gain of $450,000.

A taxpayer is responsible for paying the higher of the federal tax calculated under the regular rules, and the AMT amount. In this example, John's federal tax liability in 2023 would be $50,523. This amount jumps by $6,063 (nearly 12%) to $56,785 under the new rules beginning in 2024.

Consult a Tax Professional

Remember, the AMT is an additional layer of taxation to offset aggressive tax planning, and understanding its implications is crucial for effective tax planning especially if you expect to have substantial amount of gains from your crypto or other capital property investments.