CRYPTOCURRENCY TAX compliance

A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to centralized digital currency and central banking systems.

Cryptocurrency is a digital representation of value that is not legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it.  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.  

Canadians acquiring a cryptocurrency – a digital representation of money such as Bitcoin (BTC) or Ethereum (ETH) - are often confused when their activities require reporting to the government and subsequent tax liability. Since cryptocurrencies are not recognized as “legal tender” under Canada’s laws, they are taxed as “commodities” under Canada’s Income Tax Act, similar to gold or silver investments.

Generally possessing or holding a cryptocurrency is not taxable. But there could be tax consequences on any transaction - selling, gifting, bartering - that results in transferring ownership of a cryptocurrency to another party is potentially a taxable event as per 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

The income you get from disposing of cryptocurrency may be considered business income or a capital gain. In order to report it correctly, you must first establish what kind of income it is.

The following are common signs that you may be carrying on a business:

• you carry on 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. Another factor in deciding if there is a business activity is the date when the business begins. If you are still setting up or preparing to go into business, you might not be considered to have started the business. You usually have to undertake significant activity that is part of your income-earning process. Any funds or property you receive before your business begins are not generally considered to be business income. Similarly, you cannot claim deductions for income tax purposes before the business begins. Followings are some examples of cryptocurrency businesses are:

• cryptocurrency mining
• cryptocurrency trading
• cryptocurrency exchanges, including ATMs

Generally, Taxpayers who speculate in cryptocurrency by buying and selling them using conventional currency will find that 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. Essentially, cryptocurrency can be thought of the same way as any other piece of property, when they are disposed of for a price higher than what was paid, a capital gain will arise, and one half of the gain will be included in the taxpayer’s income.

This type of transaction done many times over the taxation year could lead to further complications. For example, if a taxpayer repeatedly purchases and sells Bitcoins for a profit, the CRA may choose to assess the taxpayer as being in the business of speculating on Bitcoins, and include all profits in the taxpayer’s income as business income instead of 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. This is called the taxable capital gain. 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.

Businesses that accept cryptocurrency as a means of payment must include their equivalent dollar value as “Revenue” in accounting for or reporting business operations.  Regulations that apply to the GST/HST continue in force for businesses with reporting amounts based on the fair market value at the time of acquisitions.

OTTAWA – The Canada Revenue Agency wants to know the identity of every client of a major Canadian cryptocurrency trading platform as part of its effort to fight tax fraud and the underground economy. In a September 2020 filing to the federal court, Canada’s tax agency is asking a judge to force Toronto-based crypto trading platform Coinsquare to hand over information and certain documents about all its clients since the beginning of 2013. In its filing — the first of its kind involving a Canadian cryptocurrency exchange — the CRA says it needs all the information to ensure that Coinsquare’s customers have “complied with their duties and obligations” under Canadian tax laws.

In other words, CRA wants to make sure that the firm’s clients have declared all their income, paid their fair share of taxes and haven’t used cryptocurrencies to hide assets. The details contained in the few documents available from the federal court are scarce, but all this likely means that CRA wants to know which Canadians have been trading on Coinsquare’s platform, and then compare it to their past tax filings.

This article does not constitute legal, investment or tax advice. It is presented for general information only and is not intended to be relied on personal tax, accounting, or legal advice. The regulations affecting cryptocurrencies are subject to change at any time without notice. Readers should consult their investment and tax advisers regarding their circumstances before purchasing or trading cryptocurrency.