More and more Canadians are venturing into cryptocurrency-based investments, but since it is a relatively new asset class, very few understand the fundamentals behind it and even fewer may know the tax implications of cryptocurrency transactions. In this blog, we will discuss the most common types of cryptocurrency transactions and their tax implications for the Canadians.
Merriam-Webster dictionary defines cryptocurrency as any form of currency that only exists digitally, that usually has no central issuing or regulating authority (central banks) but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions. Canada Revenue Agency on the other hand views cryptocurrency as a commodity for tax purposes and as with any other commodity it is subject to capital gains taxes and in some cases HST.
As with any other commodity, income realization occurs on disposition, or simply put, when we dispose or get rid of something. Possessing crypto is not taxable on its own when for example a father gifts Bitcoin tokens to a child or when it’s as part of an inheritance. But there will be tax consequences when any of the following applies:
Sell or gift cryptocurrency
Trade or exchange cryptocurrency (i.e. exchange equivalent amount Bitcoin for Ethereum)
Convert cryptocurrency to any other currency issued by a central bank (i.e. Canadian dollar)
Buy goods and services using cryptocurrency
An individual is considered to be conducting cryptocurrency business activity or subject to capital gains tax if the individual displays any of the following signs:
Carrying on viable commercial activity in regular intervals for generating profit, although a single transaction may also be considered business activity if material in nature
The activity is well-planned and business-like which involves creating business plans, operational and capital asset budgets
The activity involves promotion and advertising
The individual operates and behaves in a way which others may interpret as a profit-oriented business activity
Common cryptocurrency-related business activities are:
Cryptocurrency mining: cryptocurrencies are acquired in two ways, either through cryptocurrency exchanges, or earned through mining. In mining operations, specifically-configured computers are tasked to solve complex mathematical algorithmic problems in order to complete a valid “block”. The miner will then combine the blocks to form a valid “blockchain”. The miner will receive two kinds of payments in cryptocurrency for his/her services:
Fee for the creation of the cryptocurrency
Fee for the successful validation of the cryptocurrency
As with any other business, the miner can claim business expenses, capital cost allowances, business loss carry-forward/backs versus their income. Cryptocurrency miners are required to maintain receipts for the following purchases and expenses:
Mining pool fees
Hardware and software
Power and internet expenses
Cryptocurrency trading: As mentioned earlier, when an individual trades one cryptocurrency for another, the barter transaction rules will apply to the transaction. This means the transaction is considered to be a disposition and has been converted into the Canadian dollars for tax purposes. The resulting gain or loss from the transaction will be reported as a capital gain (loss) on the individual’s income tax return.
Cryptocurrency funds: These funds are a new class of investment vehicles similar to mutual funds or Electronically Traded Funds (ETFs) who invest exclusively in a specific cryptocurrency, or they invest in a basket of various cryptocurrencies. Investment in these funds is very similar to a mutual fund where investors buy a specific “unit” in the fund. The fund will then invest investor funds in various cryptocurrencies. The units are marked-to-market on daily basis. Upon disposition of the unit, the capital gain (loss) will be reported in the individual’s form T5008.
Individuals and businesses should maintain adequate records for crypto transactions. Adequate records include the following (source: Canada.ca):
Value of the cryptocurrency in the Canadian dollar
Date of transactions
Receipts for the purchase of cryptocurrency
Digital wallet records and addresses
Description of the transactions
Exchange records
Accounting and legal costs
Taxable property and services purchased with cryptocurrencies are subject to HST/GST. The amount is calculated at fair market value (FMV) of the cryptocurrency at the time of the transaction. If a business accepts cryptocurrency as a mode of payment, complete records must be kept as to how the fair market value was calculated.
For further information please contact Softron at 1-877-SOFTRON or visit www.softrontax.com
