Guide to CRA’s Tax Treatment of Cryptocurrency
With millions of miners and traders in 2021, Bitcoin is viewed as the latest craze in the financial market. It continues to accumulate and prosper despite the risks associated with it. Dubbed as the Modern Tulip Mania, its growth has been massive and instant. Just like the other investment bubbles, Bitcoin has always been surrounded by controversies.
For the skeptics, its notoriety for price volatility is comparable to digital gambling. A person may lose all his fortunes in the wink of an eye. But for the believers, its promise of a utopic future remains affirmative. It appears to be a digital stepping stone that may change the investing world forever.
Meanwhile, people are concerned about how much wealth a Bitcoin trader can either get or lose. Even so, its function remains different from money and other investments. It is not yet considered legal tender. But, it’s a commodity that can add value to a person. With that, is Bitcoin subject to taxation? If so, one must know how and how much it is taxed in Canada.
A Brief Overview of Bitcoin in Canada
Created by Satoshi Nakamoto, Bitcoin started to circulate in 2009. Over the past decade, it has grown drastically, with millions joining the bandwagon. About 20 million bitcoins have already been mined to date. It continued to capture and feed the imagination of many people. Regardless of economic conditions, it remained an attractive form of investment. Despite its volatile price, its demand kept accumulating.
Canada’s statistics show that about 4% of its population uses cryptocurrencies. It has observed a 1.7% increase in adult users since 2019. But the younger ones occupy the majority of the community. Most of them believe that it’s a risk worth taking. Aside from Bitcoin, the popular cryptocurrencies are Etherium, Dogecoin, Dash, Litecoin, and Zcash.
Although it does not function as money, it remains appealing to Canadians. In fact, there are over 1,000 ATMs in the country. Toronto tops the list with more than 300 ATMs. Meanwhile, Vancouver leads with over 100 businesses that accept Bitcoin. Currently, its price ranges from $40,000 to $50,000, which shows that it won’t mellow down soon. That’s why the government and other agencies try to regulate it through taxation and other laws.
How Cryptocurrency Is Taxed in Canada
According to the CRA, Bitcoin is still taxable even if it does not function as money. It views it similarly to gold and oil. One must understand that it is not a legal tender but a commodity. So, selling Bitcoin in exchange for another Bitcoin is a barter transaction. Taxes are levied on all commodities, and Bitcoin is not an exception. Regardless of how you obtain Bitcoin, the fact that it increases your wealth makes it taxable. Whether Bitcoin is tangible or intangible, taxes are applicable since it generates income. In 2020, the agency released a clear guide for digital tax and cryptocurrency tax in Canada. The US and Canada consider these instances:
- Even if it is not disposed of or sold, bitcoin from mining is always taxed.
- If it is sold, cashed, and used for purchases, taxes will apply if it is higher than the fair value during the acquisition. Potential capital gains are assumed regardless of the short-term or long-term Bitcoin rates.
An owner must determine how he does Bitcoin transactions. Although owning digital currencies are not subject to taxes, the following are taxable:
- Sale of Bitcoin
- Bitcoin as a gift to other owners
- Disposition of Bitcoin in exchange for another bitcoin.
- Bitcoin conversion to Canadian Dollars (CAD)
- Purchasing of goods or services using Bitcoin
What Digital/ Cryptocurrency Transactions Are Taxable in Canada
Taxpayers must determine whether a cryptocurrency activity results in income or capital. Taxpayers who buy and sell cryptocurrency may not be carrying on a business. For tax purposes, the CRA treats cryptocurrency transactions as barter transactions. A barter transaction is an exchange of goods or services without legal tender.
Bitcoin as Business Income
The following instances show that Bitcoin income is already part of business income:
- The activities for commercial purposes generate earnings.
- The transactions of a bitcoin user appear to be a typical business setup. Some examples are the preparation of a business plan and working capital or asset acquisition.
- Goods and services sales and promotion
- A subtle or overt objective to earn, regardless of short-run doability.
You must remember that businesses have specific regularities in their processes. Even so, you should not generalize transactions. You must also consider the date of business establishment. Note that the preparation and setting up are not considered part of the actual operations. Hence, income generated before the official establishment is not taxable.
These are some transactions related to the cryptocurrency business:
- exchanges, including ATMs
Paragraphs 9 to 32 of Interpretation Bulletin IT-479R: provide general guidelines to help you identify if transactions are either income or capital gains. Although it is helpful, cryptocurrencies are not considered Canadian securities under the Income Tax Act. It means that if Bitcoin is sold or traded as part of business activities, the generated value is subject to cryptocurrency tax. Moreover, buying bitcoin for future earnings is also part of business income. Bitcoins under business income are reported via the T2125 Statement of Business or Professional Activities.
Bitcoin as Capital Gains
The excess amount from a Bitcoin sale is not part of the business process of capital gain. Capital gains are part of income for the year, but only 50% of it is taxable. If a Bitcoin user incurs losses after the sale, he can use it to offset capital gains but not reduce taxes. But if he incurred pure losses, it will not be taxable anymore. Also, it can be a deduction to taxable capital gains in the following year. Given this, the sole purpose of capital losses is to offset capital gains and not reduce income taxes. You can report it via Guide T4037, Capital Gains.
Valuing Bitcoin Either As Capital Property or Inventory
Taxes depend on bitcoin valuation. If Bitcoin and other cryptocurrencies are part of capital assets, the modified cost base must be watched closely. It must be done to ensure accurate reporting of capital gains. These techniques can help in doing consistent valuation if you treat your Bitcoins as inventories:
- Choose whichever is lower between its acquisition cost and its value at the end of the year,
- Value the inventory at its fair market value at the end of the year (generally, the cost of replacing items or the proceeds or value derived from the sale).
You may use other inventory valuation methods. For example, properties treated as inventories of an adventure business must be valued at their paid or acquired value.
To determine the lower value, you must compare the cost and the fair market value. Hence, the accumulated value of the inventories at the end of the year is estimated using the lower value for the items (or each class of things if specific items are difficult to separate).
Meanwhile, the “Cost at which the taxpayer obtained the property” is the initial cost of the inventory plus all reasonable costs of acquiring a block of cryptocurrency.
Trading Bitcoin for Another Bitcoin or Other Cryptocurrencies
The sale or disposition of bitcoin in exchange for another cryptocurrency is similar to a barter transaction. You may convert it to Canadian Dollars. Hence, you must report ITR either as business income/loss or capital gain/loss.
Mining of Bitcoin and Other Cryptocurrencies
Specialized computers are essential in bitcoin mining. They solve complicated equations that confirm mined Bitcoins as part of blocks. If the user estimated or guessed the right number, he can create a new valid block in a blockchain. From there, the miner will receive two payments from the system. These equate to cryptocurrency creation and the fees related to the new block. Since it generates income, it is subject to taxes, whether a hobby or a business activity.
Examples of Cryptocurrency Businesses
|Cryptocurrency Mining||Cryptocurrency mining or cryptomining is a process wherein transactions are verified and added to a blockchain.|
|Cryptocurrency Trading||It is a transaction wherein a user speculates cryptocurrency’s future price through a CFD trading account. It also involves buying and selling in an exchange.|
|Cryptocurrency Exchanges||It is a digital marketplace or platform where cryptocurrency transactions take place.|
The CRA’s rules and tax laws are rapidly evolving to catch up with blockchain finance technology. Reach out to tax accountant experts from Faris CPA to understand digital and cryptocurrency tax obligations and the unique needs of all altcoins and exchanges.
Get the most out of cryptocurrency, digital money, and other blockchain-based finances by getting in touch with a professional accountant.
Seek Professional Help With A Digital / Cryptocurrency Tax Accountant
FarisCPA can help you identify the proper computation for your taxes. Also, they can communicate with the CRA and navigate the entire dispute process on your behalf. FarisCPA guarantees that accountants are adept at calculating business transactions and taxes.
Moreover, there are businesses, particularly in Toronto, that accept Bitcoin payments. In 2020, the government released new rules on taxation in the digital economy. Non-resident vendors of digital items must pay Canada’s digital tax. For this reason, you must identify if you are subject to double taxation (cryptocurrency tax and digital tax). Its expert tax accountants also cover cryptocurrency and digital taxes. If you have Bitcoin or other cryptocurrency income, feel free to speak with a professional tax accountant right away.
For more information, contact us to discuss your tax situation. We will determine how we can help.
Digital / Cryptocurrency Tax Accountant FAQs
Do I need to file taxes for cryptocurrency?
Yes. Cryptocurrency is taxable. Your cryptocurrency income can be from business, capital gains, and other applicable categories. For each transaction, there is a corresponding guideline or form for tax filing.
Is it important for accountants to understand digital currency?
Yes. Although digital currencies don’t function as money yet, they can affect a person’s wealth. With its versatile uses, it has a substantial impact on the financial market.
How to calculate taxes on Cryptocurrency?
You have to compute for realized gain or loss. It is the income generated from cryptocurrency transactions. From there, you can estimate the applicable taxes. For a more specific computation, you may refer to FarisCPA and seek their assistance.