Taxation of Cryptocurrencies
Basic Concepts
There are many questions when it comes to how cryptocurrencies are taxed and what you are required to report for tax purposes. CRA has taken the stance on cryptocurrency that they tend to have on a multitude of income tax subjects, which is “it depends on the fact and circumstances.” This can cause confusion for taxpayers and difficulties for advisors as well. Below is some information to help identify when you may have income tax reporting obligations from cryptocurrency transactions.
Cryptocurrency may contain the word “currency”, but it is taxed as a commodity for purposes of the Income Tax Act. Gains or losses can be treated as either business income or capital, depending on the circumstances of the transaction. If you hold multiple types of currency through an exchange or wallet, they are treated as separate assets and must be valued separately.
Reporting Income
Income or losses must be reported on dispositions of cryptocurrency. Dispositions arise when you do any of the following:
- Sell or make a gift
- Trade or exchange, including converting one type of cryptocurrency to another (such as converting Bitcoin to Etherium)
- Convert cryptocurrency to cash
- Use cryptocurrency to purchase goods or services
Dispositions do not include buying cryptocurrency and holding it, transferring between wallets, or transferring cryptocurrency between an external wallet to a brokerage account.
Income or Capital?
Reporting income appropriately is very important as business income is fully taxable, but capital income has an income inclusion rate of 50%. There are a number of factors that CRA uses for determining business income such as:
- you carry on the activity for commercial reasons and in a commercially viable way
- you undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory
- you promote a product or service
- you show that you intend to make a profit, even if you are unlikely to do so in the short term
Business activities normally involve some regularity or repetitive process over time. Single transactions can be considered a business when it is an adventure or concern in the nature of trade. Cryptocurrency businesses include mining, active trading, or exchanges (including ATMs).
Most cryptocurrency users hold for capital appreciation and transact irregularly, so they would not be considered a business. In this case, income can be reported as capital.
GST/HST Considerations
Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
If your business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.
Keep all records that show how you calculated the fair market value.
Keeping Books and Records
If you acquire or dispose of cryptocurrency, you have to keep records of your transactions. When valuing cryptocurrency, you can choose the exchange rate from your broker or an average of midday values from high-volume brokers. However, you must be consistent with the method you choose.
The easiest method is likely to use the rate at the date of the transaction provided by your broker. However, brokers have different standards for records and how long they keep them. It is best practice to export your records regularly, so you always have a copy. You are required to keep supporting documents for at least six years from the end of the last tax year they relate to.
CRA recommends maintaining the following records on cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party (even if it is just their cryptocurrency address)
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs.
If you are mining cryptocurrencies, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time)
- the mining pool details and records
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time)
- the mining pool details and records
Relief for Unreported Income
If you have already filed your tax return and missed reporting income from cryptocurrency transactions, you can correct the error using CRA’s voluntary disclosures program. This program may provide interest and penalty relief for voluntary correcting unreported income.
Foreign Reporting
If the total cost amount of specified foreign property you own is over $100,000 CDN, CRA requires a T1135 – Foreign Income Verification Statement be filed with your tax return. CRA takes the position that the foreign reporting requirements extend to cryptocurrencies that are situated, deposited, or held outside of Canada. If you hold your cryptocurrency outside of Canada it could be subject to foreign reporting requirements if it exceeds a cost of $100,000, or if the cost of cryptocurrency held outside of Canada and all other foreign assets exceeds $100,000.
For more information, contact our office or view CRA’s cryptocurrency guide at:
