Guide to CRA’s Tax Treatment of Cryptocurrency
Cryptocurrencies are developing assets and the tax treatment and regulations of them are also developing. The current climate is highly volatile making them highly risky investments. At least for now, the tax treatment of the various transactions involving cryptocurrencies by the CRA is fairly stable. That said, things can quickly get complicated when dealing with cryptocurrencies.
The complications arise from the location of the cryptocurrencies such that your cryptocurrency may be foreign property giving rise to the various foreign property reporting requirements. The complications are also related to the transactions that one can do with cryptocurrencies and the treatment of cryptocurrencies as a commodity where almost every disposition and acquisition is a sale and purchase.
Cryptocurrencies have been around for many years now, starting with the Bitcoin network that came into existence in January 2009. The identity of the inventor of Bitcoin, names, Satoshi Nakamoto, is unknown. Since the launch of the Bitcoin network, many other cryptocurrencies have sprung up with various levels of success and popular adoption. For many reasons, including the promised freedom from exchange rates and central bank controls, cryptocurrencies started becoming more and more part of the mainstream world.
In 2021, with this rise in popular exposure, many people understand what cryptocurrency is on a general level. However, the number of people who are knowledgeable about cryptocurrencies and their interaction with the traditional, non-digital, world of commerce and finances, are relatively few.
One way that the digital world of cryptocurrencies interacts with the physical world is when it comes to taxes. People use cryptocurrencies as a store of value, a medium of exchange, or a means of investment. All of these financial uses of cryptocurrencies have the potential to engage existing laws that were not designed with cryptocurrencies in mind. These laws include money laundering laws, crime prevention laws, anti-corruption laws, and of course tax laws.
For Canadian taxpayers, especially those who are new or relatively new to the cryptocurrency world, but want to get involved with this new digital currency, it pays to take some time to get to know how the Canada Revenue Agency treats transactions that involve cryptocurrencies. This will save you a lot of headaches and money when the CRA eventually does come knocking.
In this article, Faris CPA’s team offers you a general guide to some of the tax topics that are engaged by cryptocurrencies. Remember, however, that your particular facts and circumstances will have an impact on the specific tax outcomes of your particular dealings with cryptocurrencies.
Introduction to Cryptocurrencies
Cryptocurrencies are at core a cryptographic record that is part of a distributed ledger called a blockchain. There are many uses that blockchain technology can be put to. Because blockchains can be divided into units and those units can be further subdivided, one that has been adopted by cryptocurrencies is as a medium of exchange similar to money (for this reason they are sometimes called Altcoin or Crypto Assets).
However, it is important to be aware that although people generally treat cryptocurrencies as a representation of value, like fiat currencies issued by governments, no government or central bank in the world considers cryptocurrencies to be legal tender. Also worth noting is that unlike fiat currencies issued by governments, cryptocurrencies have no underlying value and are not tied in any way to the value of the real economy.
There exist a huge variety of cryptocurrencies and all that is needed to create a new Cryptocurrency is programming knowledge of blockchain technology. The most common cryptocurrencies today, include:
- Bitcoin cash
- Binance Coin
For more on the basics of cryptocurrency, check out our Canadian tax guide for cryptocurrencies.
History of Taxation of Cryptocurrencies
When cryptocurrencies started being used by people as a medium of exchange, various governments had to figure out how to tax transactions that would otherwise have been taxable if the transaction was undertaken using more traditional methods (using barter, cash, promissory note, etc).
The Canadian government’s Standing Committee of Banking, Trade, and Commerce, set up a task force to perform a review of cryptocurrencies and the tax issues that they raise. The report, named “Digital Currency: You Can’t Flip This Coin”, found several positive and negative aspects of cryptocurrencies. The challenges included:
- Exploiting the anonymity of digital currencies to undertake illegal activities, such as money laundering, terrorist financing, and tax evasion;
- Losing digital currencies because of cyber-theft, the bankruptcy of digital currency exchange, or volatility in the price of digital currencies; and
- Applying our taxation rules to digital currency transactions in a manner consistent with other types of transactions.
As a result of the report’s identification of the taxation of the emergence of cryptocurrencies, the Canada Revenue Agency and the Ministry of Finance started developing guidelines of how transactions involving cryptocurrencies would fit into and would have to be taken into by existing tax laws. The purpose of this was to educate the Canadian public of their obligations and rights, including tax obligations, that resulted from their use of cryptocurrencies.
Canada is in the process of creating its own, government-regulated, cryptocurrency for use in consumer transactions. This is a work-in-progress and may morph into something different as time goes on.
CRA’s tax Treatment of Cryptocurrency
As far as the CRA is concerned, cryptocurrencies are commodities (such as gold, oil, lumber, etc.). Given their treatment as commodities, any transaction involving them is treated as the equivalent of the comparable transaction in a commodity. For example, if they are used to pay for another good or service, the treatment is the same as any barter transaction. If you are in the business of buying and selling a commodity, you earn business income. If you are a passive investor in a commodity, the gains are capital gains. As you can see, this variety of uses and interactions with cryptocurrencies makes their tax treatment complicated.
Considerations When it Comes to Crypto taxation
Where you are involved in transactions involving cryptocurrencies, you should report the transaction in your various tax returns, properly characterize the nature of the income, and determine your tax liability as a result of those transactions.
In characterizing gains or losses, you have to consider whether you have employment income, business income, or capital gains (or their respective losses). You also have to determine whether GST/HST applies to the transaction, as well as the value to assign to the transaction. There are a lot of moving parts, and this can get confusing even to seasoned businesspeople.
CRA’s Tax Treatment of Cryptocurrency that is used to Pay for Goods and Services
Any transaction that involves the use of cryptocurrency to pay for goods or services is a barter transaction. Barter transactions are transactions where there is an exchange of goods and services for other goods or services and excludes the use of fiat currency or another legal tender as the medium of exchange. For example, if I wash your car in exchange for you mowing my laws, we have engaged in a barter transaction. Whether or not it is taxable or not, depends on various factors.
Depending on the nature of the barter, there may be tax consequences to the person providing the good or service, in that they may have a business income if they are in the business of providing that good or services, or they are involved in what the CRA calls “an adventure or concern like trade”. The person using the cryptocurrency to make payment may also have tax consequences as the disposition of the cryptocurrency as payment may result in a gain or loss to them, even if they are not in business.
Estimating Value of Crypto Transactions in the Absence of a Direct Value
To be able to tax a transaction, there needs to be some gauge of value for the transaction. Some transactions may make it difficult to apply a direct value to the exchange, and this uncertainty can lead to serious tax issues.
The CRA’s guidance on transactions where there is no direct value determination is that the transaction is going to be considered to have occurred at Fair Market Value (“FMV”). This, itself, is not a clear determinant because FMV is defined as:
The amount a person who does not have to buy will pay to someone who does not have to sell, being the amount that the selling person will accept, for the particular good or services in an unregulated market.
The ways you can estimate the value of the exchange include:
- Using the exchange rate for the cryptocurrency you are using by reference to the value it is trading at (at the time of the trade, the average for the day, or the average for the week);
- Using the value that the good or service is usually provided for in Canadian dollars were you to use fiat currency; pr
- Suggested retail prices for the particular good or service.
There are other ways of estimating the value. What matters is that you use a reasonable approach and consistently use that same approach for all transactions. To help with your fight against the CRA, you should also maintain records of past crypto transaction value estimates, including:
- Keep track of transaction dates
- Keep receipts of transactions
- Record the value of cryptocurrency converted to Canadian dollars at the time of the transaction
- Digital wallet records and cryptocurrency addresses
- Description of the transaction
- Record of other parties involved
- Exchange records
- Accounting and legal costs incurred
- Software costs
How the CRA Views Multiple Crypto Assets
Keeping all crypto-assets in a single wallet is a high risk since all the crypto-assets will be lost if that wallet is compromised. This is why many investors consider using a combination of multiple wallet types and providers to reduce the impact of an individual compromised wallet.
Since cryptocurrency is a type of digital asset that is intangible, taxpayers are allowed to own more than one type of cryptocurrency. According to the CRA, however, each cryptocurrency should be treated as a separate digital asset. If you hold more than one type of cryptocurrency in a digital wallet, each type of cryptocurrency is considered to be a separate digital asset and must be valued separately.
Moreover, converting or exchanging cryptocurrency for another one is considered a sale and repurchase. In other words, as far as the CRA is concerned, exchanging one coin for another is like selling the first coin for a dollar and buying another with the dollar. Therefore, it is considered a taxable event.
CRA’s Tax Guidelines on Reporting Business Income from Cryptocurrency Disposition
As part of the CRA’s tax guidelines, taxpayers need to report on their tax return any disposition of cryptocurrency. Cryptocurrency disposition means the sale, or implied sale, of any crypto. This includes sales of crypto for fiat currency, or trading one coin for another, or purchasing goods and services by paying for them with crypto. In other words, it is any transaction that involves selling, giving, or transferring any type of cryptocurrency.
Further, here are some crypto disposition transactions that have tax implications:
- Exchanging or bartering cryptocurrency (This includes cases wherein you dispose of one type of cryptocurrency in order to acquire another type)
- Selling cryptocurrency
- Giving cryptocurrency to another as a gift
- Paying for goods or services using cryptocurrency
- Converting cryptocurrency to legal currency (This includes exchanging cryptocurrency for Canadian dollars)
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you acquire or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses accepting cryptocurrency as payment for goods and services.
If you are using cryptocurrency exchanges for your business, you must export information from these exchanges periodically in order to not lose your transaction history. You are responsible for keeping all records and supporting documents for at least six years from the end of the last tax year to which they pertain.
Maintain the following records regarding 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.
How To Determine If It’s Business Income or Capital Gain from Disposing Cryptocurrency
In order to report it correctly to the CRA, taxpayers need to determine whether they have acquired crypto as business income or capital gain from disposition.
To determine if it’s a business income, you must look into activities that normally involve some regularity or a repetitive process over time. But in some cases, a single transaction can also be considered a business when it is an adventure or concern in the nature of trade.
Some notable examples of cryptocurrency businesses include cryptocurrency mining, cryptocurrency trading, and cryptocurrency exchanges. Apart from that, you must also look into common signs that you may be carrying on a business such as:
- Done for commercial reasons
- Promoting or marketing a product or service
- Performed in a businesslike manner, which might involve creating a business plan and acquiring capitals assets or inventory
- With intent to produce a profit, whether short-term or long-term
Another factor in determining whether or not there is a business activity is the date it begins. If you’re just starting or preparing to do business, you might not be considered to have started a business; you typically have to engage in activities that are part of your income-producing process.
In nutshell, the profits from the disposition or sale are considered business income and not a capital gain. Buying a cryptocurrency with the intent to sell it at a profit is considered business income, even if it’s an isolated incident because it could be classified as an adventure or concern like trade.
CRA’s Tax Treatment of Capital Gains from Crypto Transactions
It is considered that the taxpayer has realized a capital gain if the cryptocurrency sale does not constitute carrying on a business compared to the amount it sells for over the original purchase price. This capital gain from the sale of cryptocurrency is 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.
However, any capital losses resulting from the sale can only be offset against capital gains. You cannot use them to reduce other sources of income, such as employment income. Capital losses can be carried forward if you do not have any capital gains in that year or any of the three previous years against which to offset them.
For more information on the CRA’s taxation of capital gains in general, refer to our guide: https://fariscpa.com/cra-forms/cra-t4037-form/
CRA’s Guide on Trading Cryptocurrency for Another Cryptocurrency
In the eyes of the CRA, when you dispose of one type of cryptocurrency to acquire another cryptocurrency, the barter transaction rules apply. With that, you have to convert the value of the cryptocurrency from your bank account into Canadian dollars. This is considered a disposition, so it’s tax-deductible on your income tax. You can report the resulting gain or loss as either business income (or loss) or a capital gain (or loss).
In general, when a taxpayer does not engage in the business of trading in cryptocurrency, any gain or loss generated upon disposition of cryptocurrency is accounted for as capital income. However, if a taxpayer invests in cryptocurrency or trades in it, gains or losses resulting from it should be accounted for as income. The value of the cryptocurrency received in exchange for a property should be equal to the value of the property given up as a consideration.
CRA’s Guide on Cryptocurrency Mining
Cryptocurrency mining is the process in which transactions between users are verified and added to the blockchain public ledger. Mining is also responsible for introducing new coins to the circulating supply and is one of the key elements that allow cryptocurrencies to function as a peer-to-peer decentralized network lacking a central authority. In short, cryptocurrency mining is a term that refers to the process of gathering cryptocurrency as a reward for work that you complete.
As far as the CRA is concerned, mining of cryptocurrencies can be undertaken for profit if done as a hobby but in a businesslike manner, or as a personal hobby that is nontaxable. This means that if the taxpayer mines in a commercial manner, the income from that business must be included in the taxpayer’s income for the year. Such income will be determined concerning the value of the taxpayer’s inventory at the end of the year.
With that, every taxpayer who does cryptocurrency mining is encouraged to keep receipts of any cryptocurrency mining hardware bought, receipts of expenses incurred while mining, and the records of the mining pool.
Valuing Cryptocurrency When Filing Income Tax Returns
For tax purposes, you need to know how to value cryptocurrencies. This depends on whether they are considered capital property or inventory.
The type of income that the property generates upon sale-that is, capital gains or business income-determines whether that property is a capital property or inventory. In other words, one starts by determining the nature of the income and then characterizes the property.
To accurately report any capital property, cryptocurrency owners need to record and track their adjusted cost base. If cryptocurrencies are considered inventory, use one of 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.
GST/HST Considerations in Cryptocurrency Transaction
In Canada, cryptocurrency is not recognised as legal tender, so the rules that govern barter transactions apply to the purchase or sale of goods or services using cryptocurrency.
Additionally, the CRA maintains that cryptocurrencies should be viewed as commodities when purchased or sold in return for traditional currency, or transferred between people. As such, both parties in a barter transaction must determine if they must charge, collect, and remit the GST/HST based on the fair market value of the goods and services provided.
When a taxable property or service is traded for cryptocurrency, the GST/HST that applies to the product or service is calculated based on its fair market value at the time of the exchange. Whereas if your business accepts cryptocurrency as payment for taxable property or services, GST/HST calculations are made based on the cryptocurrency’s fair market value at the time of the transaction.
Related Topics o Cryptocurrency Taxation
|Cryptocurrency as Foreign Property|| |
As a Canadian resident, you are taxable on all your income no matter where in the world. What causes you to be a resident for tax reasons is different from immigration classifications. This means you can be a visitor to Canada for immigration purposes but a resident for tax purposes. This complication aside, since you are taxable on your worldwide income, the Canada Revenue Agency (CRA) wants to make sure they have the information to catch tax cheats.
The CRA gets information on international holdings directly from banks and other countries under various treaties. However, the CRA also requires you to provide them with information on your world-wide holdings and income. One such information return is the T1135 “Foreign Income Verification Statement”. Where you meet the threshold requirement for this, you have to fill the form out and send it in with your tax return every year that you meet the threshold requirement (over $100,000 in property and cash held outside of Canada at ANY time in a year).
What counts as foreign property can seem confusing when it comes to the digital world. Canadian currency held in a bank account in another country is considered foreign property. The same thing goes for cryptocurrencies. Depending on where the location of your “wallet” or “exchange” is, you may have foreign property reporting requirements without even knowing it. Not filling in and filing the T1135 form exposes you to penalties, including the failure to comply, failure to furnish foreign-based information, as well as additional penalties. This can add up to a significant amount.
In addition to the informational requirements that apply whether or not you have any gains or income on the foreign property, you have to report and pay tax on any gains or income on the foreign property, including cryptocurrency.
|Choosing Your Cryptocurrency Exchange|| |
A cryptocurrency exchange held you buy and sell cryptocurrency using either another cryptocurrency or fiat currency. Each exchange will have an offering of fiat and cryptocurrencies that you can trade. Choosing your cryptocurrency exchange is very important.
NOTE – We are not making a recommendation as to the exchange you use and nothing in this portion of the article is an endorsement of any specific exchange.
The choice of exchange will also affect whether the cryptocurrency you own is property held in Canada or foreign property. If you can use a traditional or well-known exchange, you are likely to be more protected. Wealthsimple and a number of other trading platforms offer cryptocurrency trading. Other exchanges that appear to be reputable include Coinbase, Cash App, Binance, Bisq, E Toro, and Gemini. You should look into where the exchange is located and licensed to operate to avoid falling into the trap of failing to report foreign property. The particular cryptocurrency you want to trade-in will also inform your choice of exchange.
|Deadline for Cryptocurrency Tax Filing|| |
The deadline for filing your gains and income related to cryptocurrency is the same as your other tax filing deadlines.
For individuals, this means that if you are employed and not in business for yourself, you will have to file and pay your taxes due by April 30, and for self-employed individuals, the filing deadline is June 15 (but the payment deadline is still April 30).
It is important to remember that just as with regular income, gains and income from cryptocurrency related activities are also measured to be reported, for individuals, in a Calendar year. This means that anything that happened between January 1 and December 31 of the previous year has to be reported and filed by April 30 (or June 15 if you’re self-employed) of the next year.
If you’re a cryptocurrency user, make sure you get a full grasp of the tax consequences of any crypto transaction, per the CRA guidelines, by consulting with Faris CPA today.
Did you know?
“Those who use a cryptocurrency exchange should regularly export their data.”
Read FAQs on CRA’s Tax Treatment of Cryptocurrency
What is the CRA’s tax treatment for hard forks?
Blockchain, the backbone of cryptocurrencies, can split. This can be in the form of a soft or a hard fork. A hard fork takes place when an existing blockchain splits into two or more competing versions of the original blockchain. Some people will continue to support the original forked cryptocurrency, while others will start to support the new forked cryptocurrency. The tax treatment of a hard fork depends on whether you hold the cryptocurrency as an investment or as inventory or otherwise as part of a business.
Where you hold the cryptocurrency as an investment and the cryptocurrency splits in a hard fork, then the new cryptocurrency you receive after the chain split doesn’t result in income or capital gains for you as a result of the split. You only have to pay tax on the gains or can claim a deduction for the losses when you dispose of the cryptocurrency. So, for tax purposes, it is as if nothing happened and you continue to hold the original cryptocurrency. However, the CRA’s guidelines make your cost base in the new cryptocurrency you receive equal to zero, meaning that anything you get on a sale is taxable (half taxable if it is a capital gain for you).
However, where you hold the cryptocurrency as part of a business, the new cryptocurrency you receive as part of a hard fork will be your new inventory. You will need to include the value as part of your inventory. When you dispose of this new cryptocurrency, you will have to add the amount into your business income for the year and pay the applicable tax thereon. The cost base of this inventory will gain be zero, as above.
Are initial coin offerings (ICOs) taxable?
Initial Coin Offerings (ICO) and Initial Exchange Offerings (IEO) are similar to Initial Public Offerings (IPO) of traditional stocks. They all are situations where a person or persons get to purchase a security (a stock or, in the case of cryptocurrencies, an unreleased cryptocurrency or exchange) before the security is publicly tradeable.
The purchase of a security, in this case a cryptocurrency, as part of an initial offering is not itself taxable. This is the same as if you had purchased the cryptocurrency that was already being traded on an exchange. You are only taxed if and when you dispose of the cryptocurrency and have either a gain or a loss. Your cost base in the things you purchased as part of the initial offering is what you paid for it, not what price the thing starts trading at on day one.
Be careful of a potential trap. If you use your existing lot of cryptocurrencies to make the purchase of the initial offering, then you have to consider the tax on the disposition of the cryptocurrency you use to make the purchase. This means that you may have a gain or a loss on the sale of the cryptocurrency used to make the purchase as part of the initial offering and this is taxable and reportable to the CRA.
Are cryptocurrency loans taxable?
Loans in cryptocurrency are taxed similarly to loans in regular currency. This includes all the rules that apply to foreign loans, including the withholding tax obligations when making payments on a loan to a non-resident person.
If you are borrowing funds in cryptocurrency and you pay interest on that loan, then the amount of the loan you receive is not taxable and the interest you pay on the loan may be deductible or not. With cryptocurrency this can get complicated. When you borrow some cryptocurrency, the principal you owe in Canadian currency is the Canadian equivalent value when you receive the currency. After you receive the currency, the value may go up and down and you may sell the cryptocurrency for fiat currency. This gain or loss is taxable to you or deductible by you. The payment of interest using crypto has the same effect where you are deemed to have disposed of the cryptocurrency used to make the interest payment, meaning you can have a gain or loss in addition to the interest payment.
If you lend funds using cryptocurrency, then the interest you get paid is taxable to you as interest income. The Canadian dollar equivalent value on the day you advance the loan is the principal balance and you can have a gain or loss depending on the value of the cryptocurrency when the loan is repaid. This is in addition to the interest value (again in Canadian dollar equivalent) and the gain or loss on the exchange of the crypto you receive as interest. As mentioned above, if you make a loan to a non-resident, or a loan of crypto that is foreign property, there are a number of rules that apply that may require you report and pay tax on the interest whether you are paid the interest or not. This can get very complicated.
Another way you can get a loan is that you don’t borrow in cryptocurrency, but you get a loan against the value of your cryptocurrency holdings (like any other asset). Getting a loan is not taxable and the payment of interest may be deductible or not (depending on the purpose of the loan). However, you are exposed to the risk of fluctuations of the cryptocurrency and the automatic triggering of the liquidation of your security, leading to gain or losses that are reportable and taxable.