How to invest tax-free in a bitcoin ETF in Canada

Canada is one of the best places on Earth to invest in crypto. The regulatory environment here is crypto-positive, and Canada is on the cutting edge of crypto innovation—we were the first country to launch a crypto exchange-traded fund (ETF). 

Another perk of crypto investing in Canada: you can combine it with tax-advantaged registered accounts like the tax-free savings account (TFSA) and the registered retirement savings plan (RRSP). Using these registered accounts, you can build a tax-free or tax-sheltered crypto portfolio, respectively. What’s more, you don’t have to know your way around “crypto land”—such as crypto wallets and crypto exchanges—to do this. But you should understand how crypto gains are typically taxed in Canada, how crypto ETFs work and the overall risks of crypto trading. As with any speculative asset class, investing in crypto is inherently risky. You will encounter market swings and crashes that can test even the most experienced investors. Here’s what to keep in mind. 

How is crypto taxed in Canada?

In Canada—as of June 25, 2024—the inclusion rate for individuals for capital gains up to $250,000 is 50%, and for any portion of capital gains exceeding $250,000, it’s two-thirds (66.67%). Capital gains will be taxed at your marginal tax rate. 

For example, if you bought some bitcoin or a stock for $100 and sold it for $110 a year later, $5 of your gains would be taxed. If your marginal tax rate is 20%, you’ll owe $1 in tax. However, holding investments in registered accounts in Canada—such as the TFSA and RRSP—can help you avoid capital gains tax in two ways:

Tax-free gains: Capital gains are entirely exempt from tax, as in the TFSA and (under certain conditions) the first home savings account (FHSA). Using your TFSA, you can withdraw any and all gains without paying a single dollar in capital gains tax.
Tax-sheltered gains: Capital gains tax is not applied ntil the investment is withdrawn from the account, as in the RRSP.

How registered accounts can supercharge your crypto investments

Can you hold bitcoin and other cryptocurrencies directly in a registered account in Canada? No. But you can hold crypto ETFs in these accounts, just like you do stocks, mutual funds or other ETFs. 

In February 2021, Canada became the first country to launch a spot bitcoin ETF. (Bitcoin ETFs launched much later in the U.S., in January 2024.) “Spot” means the ETF holds actual bitcoin and not bitcoin derivatives—complex financial instruments such as futures and options that gain their value from bitcoin or crypto. Today, there are a dozen Canadian crypto ETFs on the market, including bitcoin ETFs, ethereum ETFs and multi-crypto ETFs. One ETF provider—Fidelity Investments—is sprinkling crypto into its all-in-one ETFs. 

Canadian investors are uniquely positioned to benefit from the mainstreaming of bitcoin (BTC), ether (ETH) and other cryptocurrencies. If you hold crypto ETFs in a TFSA, you can cash out your crypto without paying taxes in Canada. If the ETFs are in your RRSP, not only do you get a tax deduction for contributing to the account, but your investments also grow tax-sheltered. Note, however, that if your investments held in a registered account lose money, you can’t claim a capital loss. (Read more about crypto and taxes.)

Taxed vs. tax-free crypto investments

Let’s compare the hypothetical after-tax gains on a bitcoin investment held for two years, from September 2022 to August 2024. The table below illustrates the advantage of tax-free gains, so we’ll assume the same purchase and sale price for BTC and a BTC ETF—although, in reality, an ETF may not track BTC perfectly. 

For the sake of simplicity, we’ve taken the ETF buy and sell prices to be the same as those of BTC itself—the approximate price of bitcoin in U.S. dollars in September 2022 and August 2024—even though the price of each ETF share is different from the price of bitcoin itself. We’ve assumed a marginal tax rate of 20%. 

InvestmentInvestment accountPurchase priceSale priceGainCapital gains taxAfter-tax gains

Bitcoin	Non-registered	$23,500	$61,000	$37,500	$3,750	$33,750
Bitcoin ETF	TFSA	$23,500	$61,000	$37,500	$0	$37,500

As you can see, in this hypothetical situation, gains for the tax-free bitcoin ETF come out ahead by $3,750, which is about 11% more than the after-tax gain on bitcoin.

Canadian crypto ETFs 

The table below lists all the crypto spot ETFs based in Canada. You can buy bitcoin ETFs (ETFs that invest entirely in BTC), ethereum or ether ETFs (those that invest entirely in ETH) or multi-crypto ETFs (those that invest in BTC and ETH). As of now, BTC and ETH are the only cryptocurrencies available through ETFs. (Figures are current as of Aug. 30, 2024.)

ETFTicker symbolManagement expense ratio (MER)Assets under management
(in Canadian dollars)

Bitcoin ETFs
Purpose Bitcoin ETF	BTCC / BTCC.B	1.5%	$2.1 billion
CI Galaxy Bitcoin ETF	BTCX.B	0.77%	$724.7 million
Fidelity Advantage Bitcoin ETF	FBTC	0.69%	$491.6 million
3iQ Coinshares Bitcoin ETF	BTCQ	1.75%	$283 million
Evolve Bitcoin ETF	EBIT	0.75%	$165.5 million
Ethereum (ether) ETFs
Purpose Ether ETF	ETHH / ETHH.B	1.47%–1.49%	$318.7 million
CI Galaxy Ethereum ETF	ETHX.B	0.77%	$385 million
Evolve Ether ETF	ETHR	0.75%	$55.2 million
3iQ Ether Staking ETF	ETHQ	1.97%	$65.8 million
Fidelity Advantage Ether ETF	FETH	0.95%	$18.7 million
Multiple cryptocurrency ETFs
Evolve Cryptocurrencies ETF	ETC	0.85%	$35.4 million
CI Galaxy Multi-Crypto ETF	CMCX.B	1.03%	$3.7 million

U.S. crypto ETFs: Should you invest?

U.S.-based bitcoin ETFs have created quite a buzz in 2024. The Securities and Exchange Commission (SEC) approved the first one in January, almost three years after Purpose Investments launched Canada’s first spot bitcoin ETF. 

Numerous American ETF providers now offer bitcoin ETFs, including big investment brands like BlackRock’s iShares, Fidelity and Invesco. Canadian investors can buy these ETFs, too, through their discount brokerage account—just like they would any U.S. stock or ETF. And, yes, these ETFs can be held in registered accounts like the TFSA or RRSP.

Which is better: Canadian or U.S. ETFs? 

Truth be told, there’s not much difference between the two. For instance, bitcoin ETFs in both countries hold the same underlying asset: bitcoin. Investors could make a decision based on their preferred parameters. 

For example, you may pick the bitcoin ETF with the lowest management expense ratio (MER) or the highest assets under management (AUM), or you could look for the oldest fund—regardless of where it’s based. 

If you go with a Canadian ETF, you could have more choices to make: Do you want a Canadian ETF that hedges its currency risk or one that doesn’t? Do you want to hold the ETF in U.S. dollars? The table below lays out the options for one example, the Purpose Bitcoin ETF. (Figures are current as of Sept. 13, 2024.)

ETF (ticker symbol)CurrencyCurrency hedgeOne-year return

BTCC	Canadian dollar	Yes	117.94%
BTCC.B	Canadian dollar	No	121.15%
BTCC.U	U.S. dollar	No	120.88%

In the right-hand column, you’ll notice there’s a difference in the ETFs’ one-year historical return, even though they all hold bitcoin as their underlying asset. This difference is because of the appreciation or depreciation of the currency in which the ETF holds its bitcoin. In this case, the non-hedged ETF delivered higher returns because it benefited from the appreciation of the U.S. dollar against the Canadian dollar. But there’s no way to have known this one year ago. Like all financial markets, the currency market is largely unpredictable.

Pros and cons of investing in crypto ETFs

There are advantages and disadvantages to investing indirectly through an ETF. Listed below are the pros and cons that could help you decide if this option works best for you.

Pros:

Ease of access: Investors can buy a crypto ETF just as they would any other ETF—through their online broker, financial advisor or an ETF provider. You don’t need to sign up for or learn to use a crypto trading platform.  Tax advantages: Crypto itself cannot be held in a registered account such as a TFSA or an RRSP, so any capital gains are taxable. However, crypto ETFs qualify for registered accounts, which offer tax advantages.  Professional management: You don’t need technical expertise in crypto to invest in crypto ETFs—the funds are managed by professional asset managers. Canadians have been investing in stock ETFs for decades without in-depth knowledge of stocks, because of professional fund management. Now that’s possible with crypto, too. Safe custody: Because the crypto world is rife with scams and hacks, the safe storage or custody of crypto is a big concern. In the case of ETFs, crypto custody is taken care of by the institution that manages the fund. Large asset management companies have the resources needed to protect crypto holdings from theft.

Cons:

Fees: ETFs charge investors an annual fee, the MER. This covers management, operating expenses and taxes, and it’s expressed as a percentage of the fund’s assets. So, when you invest in an ETF, your returns are reduced by the ETF’s fee. On the other hand, when you buy crypto directly on an exchange, you don’t pay a management fee. Instead, each time you buy and sell crypto, you pay a trading commission or a spread—the difference between the crypto’s bid and ask prices. If you’re a long-term, buy-and-hold crypto investor, it could be cheaper to hold your crypto directly (but you’ll also have to manage it yourself). Price divergence: Because ETFs are traded on stock exchanges—such as the Toronto Stock Exchange (TSX)—on occasion, their purchase price may deviate from the price of the crypto quoted on a crypto exchange. Because of this, a crypto ETF may sometimes be more expensive to buy than the cryptocurrencies themselves. Crypto ownership: When you buy a crypto ETF, you get investment exposure to crypto, but you don’t own the crypto itself. Instead, you own shares (or units) of the ETF—which in turn owns the crypto. For some crypto purists, this could be a deal-breaker. But for most investors—who want crypto purely as an investment and not as a currency—this is not a hindrance.

Are crypto ETFs eligible for CIPF coverage?

The Canadian Investor Protection Fund (CIPF), which is overseen by the Canadian Securities Administrators (CSA), provides limited protection for property held by a member firm on behalf of an eligible client, if the member firm becomes insolvent. CIPF member firms are members of the Canadian Investment Regulatory Organization (CIRO) that are investment dealers and/or mutual fund dealers. 

If a CIRO member becomes insolvent, the CIPF’s role is to ensure that the ETF units or shares held by the CIRO member firm are returned to eligible clients. If assets are missing, the CIPF provides coverage within the following limits: 

$1 million for all general accounts combined (such as TFSAs, FHSAs, cash accounts and margin accounts) $1 million for all registered retirement accounts combined (such as RRSPs, RRIFs and LIFs)  $1 million for all registered education savings plans (RESPs) combined, where the client is the subscriber

The CIPF doesn’t cover crypto assets directly, but it does cover crypto ETFs, provided that the ETFs are held by a member firm on behalf of an eligible client. “Investing in an ETF gives an investor ‘units’ or ‘shares’ in the fund,” explains Liz Jordan, the CIPF’s manager of policy and communications. “If the member firm holding ETF units or shares becomes insolvent, CIPF’s role is to ensure that the ETF units or shares being held by the CIRO member firm are returned to eligible clients, within certain limits. However, CIPF does not guarantee or protect the value of the ETF investment.”

Crypto ETFs still have crypto volatility risk

Bitcoin and ether ETFs have opened up the crypto investment space to everyday Canadian investors like you and me. This is an exciting opportunity, but tread cautiously. Crypto is a highly volatile asset class. Invest with a long-term time horizon, be prepared to ride the highs and lows of the crypto market, and invest only as much as you can afford to lose.

More about crypto:

Best crypto platforms and apps in Canada What are the risks of trading crypto? Mission digital: How Coinbase is reshaping Canada’s crypto landscape Should you consider ETFs that include crypto?

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