Crypto is volatile. One day it is up, and the next, it’s down. It also lacks the same legal protections as traditional currencies. But while it seems like everyone has crypto investments, cryptocurrency and debt often go hand in hand. If you don’t understand the dangers and how to mitigate them, you could wind up in debt. Let’s explore crypto so you can better navigate the risks and opportunities.
What is Cryptocurrency?
Cryptocurrency is a form of digital currency secured by cryptography. You can use cryptocurrencies to buy and sell products or services. Examples of well-known cryptocurrencies include Bitcoin and Ethereum.
Contrary to regular currencies controlled by centralized entities (e.g. banks, fintech apps), cryptocurrencies are decentralized. This means that instead of a single entity in control, there is a network of computers that track all crypto transactions. Consensus is reached via a technology called blockchain.
Blockchain is an online ledger. When you buy or sell crypto, the financial information is stored in a block. Decentralized computer networks verify each transaction and time stamp them. Once a block validates, the transaction closes and you cannot change it.
What Do Canadians Think About Cryptocurrency?
Two years ago, you couldn’t go to work or a dinner party without hearing someone rave about cryptocurrency. But a recent survey by Ipsos for the Ontario Securities Commission reveals that the hype around crypto is starting to wear off.
As Canadians learn more about cryptocurrency, opinions of the asset have declined. Canadians are now less interested in crypto and less likely to think it plays a key role in the economy. A higher number of crypto owners are expressing regret over their investment, and more Canadians think selling crypto will become harder in the future.
What is Cryptocurrency Debt?
Cryptocurrency debt is when you owe crypto to another individual or entity. There are several ways you can get into debt with cryptocurrency.
Market losses
Cryptocurrencies are unstable and risky investments. If you decide to invest in crypto, prepare for a rollercoaster ride—it’s common for these investments to experience significant ups and downs. Crypto is a speculative asset with volatility due to several market factors such as hype, the news cycle, government action, and regular supply and demand mechanics.
Unpaid taxes on crypto gains
Individuals in Canada must report and pay taxes on crypto gains. Failing to do so can result in penalties or legal consequences.
If you trade crypto as a job, you have to report all your earnings on your taxes. If you invest in crypto and earn money on trades, you must report the earnings as capital gains.
As of 2027, Canada will implement the Crypto-Asset Reporting Framework (CARF) developed by the Organization for Economic Co-operation and Development (OECD). The framework requires Canadian crypto-asset service providers to begin reporting to the CRA. The goal is to ensure tax compliance and reduce tax evasion.
Margin trading
Margin trading allows you to use borrowed funds to purchase securities (such as crypto). It’s a way for investors to access more capital for investments. But margin trading comes with a high amount of risk. While the goal is to invest more money and amplify your gains, it can also amplify losses.
Irreversible transactions
You can’t reverse transactions made with crypto. Once the transaction is verified and added to the blockchain, there’s no going back. This can expose you to scams, mistakes, or errors, with no option for help. It also means you can’t stop or cancel a crypto payment.
Crypto loan
You can borrow money via crypto credit lines or crypto loans. In essence, you use cryptocurrency as collateral for other assets or currencies. Like a regular loan, you must repay it, including interest, over a set period. When you repay your loan, you get your crypto back. While crypto loans are often easier to secure and don’t require a credit check, you risk losing your crypto collateral if the lender goes bankrupt.
How to Avoid Crypto Debt and Manage Crypto Debt
Consider the following strategies to help you avoid some of the crypto investment risks (and the debt that can follow):
- Only invest what you can afford to lose: Cryptocurrency investments involve risk. Because of the volatility, you could lose your money. In addition, be careful with more complex investing strategies like margin trading that extend your access to capital.
- Increase your crypto knowledge: Before you invest in crypto, do your research. Don’t rely on your best friend or online forum advice —unqualified sources might not know all the risks and benefits. To avoid crypto tax implications, it’s also a good idea to familiarize yourself with the tax regulations. Or, speak to a qualified tax professional so you don’t find yourself in debt to the Canada Revenue Agency (CRA).
- Check crypto seller registration: Anyone who sells securities (including crypto) in Canada has to register with their provincial or territorial securities register. Before investing, confirm the legitimacy of a company with the Canadian Securities Administrator’s search tool.
Cryptocurrency and Debt: Debt Management Strategies
If you’re in debt due to a crypto investment gone wrong, contact a Licensed Insolvency Trustee (LIT). Likewise, managing debt with crypto can introduce a lot of risk to your financial situation. A LIT will work with you to assess your debt and find a solution. The world of finance – especially cryptocurrency – can feel complex, but you don’t have to navigate it alone. Contact Allan Marshall & Associates for a free, no-obligation consultation. Call 1-888-371-8900 or fill in our online contact form.
