11/14/2021
Tax Treatment of Cryptocurrency in Canada
What is the basic nature of cryptocurrency from a Canadian tax perspective?
The CRA generally treats cryptocurrency like a commodity for purposes of the Income Tax Act.
Any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances.
Similarly, if earnings qualify as business income or as a capital gain then any losses are treated as business losses or capital losses.
How is the value of cryptocurrency determined?
To figure out the value of a cryptocurrency transaction where a direct value cannot be determined, you must use a reasonable method.
you could choose an exchange rate taken from the same exchange broker you are using or an average of midday values across a number of high-volume exchange brokers.
Whichever method you choose, use it consistently.
Which type of cryptocurrency transactions triggers tax implications?
In general, possessing or holding a cryptocurrency is not taxable.
There could be tax consequences when you do any of the following:
sell or make a gift of cryptocurrency
trade or exchange cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency
convert cryptocurrency to government-issued currency, such as Canadian dollars
use cryptocurrency to buy goods or services
Is income from cryptocurrency business income or capital gain?
Generally, if disposing of cryptocurrency is part of a business, the profits you make on the disposition or sale are considered business income and not a capital gain.
Buying a cryptocurrency with the intention of selling it for a profit may be treated as business income, even if it’s an isolated incident because it could be considered an adventure or concern in the nature of trade.
If the sale of a cryptocurrency does not constitute carrying on a business, and the amount it sells for is more than the original purchase price or its adjusted cost base, then the taxpayer has realized a capital gain.
Capital gains from the sale of cryptocurrency are generally included in income for the year, but only half of the capital gain is subject to tax.
Any capital losses resulting from the sale can only be offset against capital gains; you cannot use them to reduce income from other sources, such as employment income.
You can carry forward your capital losses if you do not have any capital gains against which to offset those losses for the year or any of the preceding three years.
When cryptocurrency transactions are considered carrying on a business?
The following are common signs that you may be carrying on a business:
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 a repetitive process over time. Each situation has to be looked at separately.
Some of the factors to be considered in ascertaining whether the taxpayer's course of conduct indicates the carrying on of a business are as follows:
frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,
period of ownership - securities are usually owned only for a short period of time,
knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,
security transactions form a part of a taxpayer's ordinary business,
time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases,
financing - security purchases are financed primarily on margin or by some other form of debt,
advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
in the case of shares/cryptocurrency, their nature - normally speculative in nature or of a non-dividend type.
The presumption that gains from security transactions are on income account will also be taken by the Department in any situation where it is apparent that the taxpayer has used special information not available to the public to realize a quick profit.
The gain or loss on the "short sale" of shares is considered to be on income account.
When the disposition of shares in a corporation is merely an alternative method of realizing income from the sale of a property held by the corporation (e.g. real estate), the gains from the sale of those shares will be included in income as if the property itself had been sold.
What is the tax treatment of trading cryptocurrency for another type of cryptocurrency?
Generally, when you dispose of one type of cryptocurrency to acquire another cryptocurrency, the barter transaction rules apply.
You have to convert the value of the cryptocurrency you received into Canadian dollars.
This transaction is considered a disposition and you have to report it on your income tax return.
Report the resulting gain or loss as either business income (or loss) or a capital gain (or loss).
How to report stock of cryptocurrency, inventory or capital property?
To file your income tax return, you need to know how to value your cryptocurrencies.
This depends on whether they are considered capital property or inventory.
When cryptocurrencies are held as capital property, you must record and track the adjusted cost base so that you can accurately report any capital gains.
If the cryptocurrencies are considered to be inventory, use one of the following two methods of valuing inventory consistently from year to year:
value each item in the inventory at its cost when it was acquired or its fair market value at the end of the year, whichever is lower
value the entire inventory at its fair market value at the end of the year (generally, the price that you would pay to replace an item or the amount that you would receive if you sold an item)
What accounting records and books I am required to maintain for cryptocurrency transactions?
If you acquire (by mining or otherwise) or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions.
This also applies to businesses that accept cryptocurrency as payment for goods and services.
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them.
If you use cryptocurrency exchanges, it's suggested that you export information from these exchanges periodically to avoid losing the information necessary to report your transactions.
You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.
You should maintain the following records on your 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 a miner, 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
There are different types of software that are available to track cryptocurrency trades and maintain records.
How does GST/HST apply to cryptocurrency transactions?
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.
For more similar content: https://www.panorama-cpa.com/TaxInsights
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