The Canadian Revenue Agency treats all digital currencies as taxable commodities. Under the current Canadian tax guidelines, most transactions that involve cryptocurrency need to be recorded and reported as taxable income.
Generally, holding cryptocurrencies is not in itself taxable. However, different taxation laws are applied depending on how the individual uses their digital assets.
Moreover, all businesses that operate with or sell cryptocurrency must report their earnings to the CRA. And, although cryptocurrencies are not considered legal tender, crypto exchanges in Canada at this time are treated the same way as traditional businesses that sell securities.
As a consequence, cryptocurrency holders should keep detailed records of transactions. Records are essential to prove how one uses cryptocurrency. How cryptocurrencies are used determines their tax consequences.
What are Your Cryptocurrencies Used For?
Central to the determination of income tax is the disposition of one’s crypto assets. Disposition refers to how an asset is disposed of. That is, if it is gifted, sold, or transferred.
There are potential tax consequences whenever cryptocurrency investors sell, gift, or trade cryptocurrency. Taxation is the case whether they are sold on an exchange or peer-to-peer. The same is true when one converts cryptocurrency into a fiat currency, such as CAD or USD, or when one uses crypto to pay for services.
It is crucial to understand how one uses cryptocurrency and other digital asses. The behavior determines the difference between business income or capital gains, which are the two primary ways that cryptocurrency is taxed in Canada.
Anyone can accept cryptocurrency as a payment for goods or services. In that case, they run a business that accepts cryptocurrencies and possibly other methods of payments.
Operations that include any of the following crypto-related activities within Canada are also treated as a business. And income from the following activities is taxable:
- mining cryptocurrency
- regular trading on exchanges or peer-to-peer
- operating an exchange
- owning crypto ATMs
From the user’s perspective, cryptocurrency is a barter trade by the Canadian tax code. Taxable barter transactions include any regularly occurring payment for a service or an exchange of goods. That means that if one accepts payment for regularly scheduled vehicle maintenance with math tutoring, this is a barter transaction. Regular exchanges of services must be recorded and reported to the CRA.
Regularity is central for the CRA to treat one’s transactions as a business. For a transaction to be treated as a taxable barter transaction, it must occur regularly. Therefore, it is unnecessary to claim the exchange of car maintenance for math tutoring if shown that this is an irregular exchange.
A person is also running a business if they regularly participate in an activity that is commercially viable. Or if they plan for the activity to be financially worthwhile in the future. This includes creating a business plan with the intention to earn a profit, or to promote goods or services.
Any profit-driven activity executed in a businesslike manner can be interpreted as using cryptocurrency in a businesslike fashion. Therefore, the regular acquisition of cryptocurrencies and the acceptance of cryptocurrency as a payment method are both treated as taxable income by the CRA. That means that those who regularly buy, sell, and trade cryptocurrencies are operating a business.
Capital gains earned on cryptocurrency are different from business income.
The profitable sale of cryptocurrency may result in capital gains tax. Earning capital from one’s digital assets does not mean that one operates a business. Nevertheless, it is still a taxable source of income. The nature of capital gains is that when investments are sold for more than the purchase price, that person must report the income to the CRA.
For instance, if one buys 2 BTC for $100,000 and then sells it for $125,000, they must declare the $25,000 earned as capital gains. 50% of the income from capital gains is then taxed. In this example, $12,500 is taxable capital gains. Likewise, if one sells the same BTC for $90,000, the $10,000 loss can be declared a capital loss against capital gains from the previous year.
However, in this case, holding cryptocurrency is just like having other valuable stocks or assets. That means that one is not responsible for capital gains on the appreciation of their cryptocurrency. It is only when the asset is disposed of that capital gains must be reported as taxable income.
The Valuation of Digital Currency
When the CRA taxes cryptocurrencies, they are taxed based on their valuation in CAD. The value is determined by fair market value. Fair market value must be determined as the highest price that a knowledgeable buyer would be willing to pay at the time of the valuation in CAD.
One way to determine the fair market value of one’s cryptocurrency is to use the values that a reputable crypto exchange in Canada has determined. Whichever method for valuation is chosen, one’s records must be consistent to avoid issues.
And each cryptocurrency must be assessed and appraised separately. If one holds both Ethereum and Bitcoin, then each asset must be valued independently based on their fair market value.
As mining cryptocurrency is considered a business, the costs required to do so are considered expenses and may be used as tax deductions. Miners should keep records of all the costs incurred, including the costs of hardware, mining pool fees, maintenance fees, and electrical fees required to mine.
CRA Keeping Good Records
The CRA recommends that those who invest in cryptocurrencies keep a detailed record of all their transactions. These records should include all of the following information:
- transactions dates
- records for purchase or transfers made with cryptocurrency
- the value of the cryptocurrency in CAD at the time of the transaction
- all digital wallet transactions and cryptocurrency addresses
- a description of what the transaction is for, including the cryptocurrency address of the other party
- exchange transactions and sales for CAD and other fiat currency
- all accounting and legal fees
- receipts for any business-related expenses
In summary, the CRA considers cryptocurrency a valuable asset, and therefore, a taxable source of income. Canadian residents who trade, sell, and earn income from cryptocurrencies must report all of these transactions to the CRA.
Essentially, all cryptocurrency transactions need to be recorded. According to the CRA, there is very little difference between crypto earnings and traditional sources of income. The differences in taxation are determined based on how digital assets are used and their value in CAD.
When organizing your Canadian income tax, ask yourself, are my cryptocurrencies used to operate a business? Do I trade them regularly? Are there capital gains to be reported? Then, based on your answers to these questions, follow the guidelines of the CRA.