Is Cryptocurrency taxable in Canada?

Is cryptocurrency taxable in Canada?

According to CRA, possessing or holding a cryptocurrency is not taxable. Howeverselling, making a gift, trading or exchanging a cryptocurrency, including disposing of one to get another, or converting cryptocurrency to a government-issued currency, such as Canadian dollars, is taxable.

Cryptocurrency for users and tax implications

Cryptocurrency, like any innovation, requires tax guidelines for Canadians to be aware of how to meet their tax obligations. In 2014, the Senate reviewed taxation on cryptocurrency and recommended action to help Canadians understand tax compliance.

Tax treatment of cryptocurrency for income tax purposes

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. 

Robust encryption techniques are used to control how units of cryptocurrency are created and to verify transactions. Cryptocurrencies generally operate independently of a central bank, central authority or government.

The following pages outline the income tax implications of common transactions involving cryptocurrency. When we refer to cryptocurrency in this publication, we talk about Bitcoin or other similar virtual currencies.

Basic concepts

The CRA generally treats cryptocurrency as a commodity for purposes of the Income Tax Act. Depending on the circumstances, any income from cryptocurrency transactions is usually treated as business income or capital gain. Similarly, suppose earnings qualify as business income or capital gain. In that case, any losses are treated as business losses or capital losses.

Taxpayers have to establish if a cryptocurrency activity results in income or capital because this affects how the revenue is treated for income tax purposes. Not all taxpayers who buy and sell cryptocurrency are carrying on business activity.

When you use cryptocurrency to pay for goods or services, the CRA treats it as a barter transaction for income tax purposes. A barter transaction occurs when two parties exchange goods or services and carry out that exchange without using legal currency. 

For more information, please review our archived content on barter transactions.

To determine the value of a cryptocurrency transaction where a direct value cannot be determined, you must use a reasonable method. Keep records to show how you figured out the deal. 

The CRA’s position is that the fair market value is the highest price, expressed in dollars that a willing buyer and a willing seller who are both knowledgeable, informed and prudent, and acting independently of each other, would agree to in an open and unrestricted market. 

For example, you could choose an exchange rate taken from the same exchange broker you are using or an average of midday values across several high-volume exchange brokers. Whichever method you choose, use it consistently.

Suppose you hold more than one type of cryptocurrency in a digital wallet. In that case, each class is considered a separate digital asset and must be valued separately. For example, a Bitcoin is valued independently from a Litecoin.

Reporting business income or capital gains from the disposition of cryptocurrency

What is a disposition?

This refers to the way you get rid of something, such as by giving, selling or transferring it. In general, possessing or holding a cryptocurrency is not taxable. But there could be tax consequences when you do any of the 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

Is it business income or capital gain?

The income you get from disposing of cryptocurrency may be considered business income or a capital gain. 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 the 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 usually involve some regularity or a repetitive process over time. Each situation has to be looked at separately.

In some cases, a single transaction can be considered a business, for example, an adventure or concern like trade. 

Whether you are carrying on a business or not must be determined on a case-by-case basis. For more information, please review our archived content on an adventure or concern like trade.

Another factor in deciding if there is a business activity is the date when the business begins. Suppose you are still setting up or preparing to go into business. In that case, you might not be considered to have started the company. 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. For more information, please review our archived content on the start of business operations.

Some examples of cryptocurrency businesses are:

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

Paragraphs 9 to 32 of Interpretation Bulletin IT-479R: Transactions in securities provide general information to help you figure out if transactions are income or capital gains. Although the discussion of income and capital in this interpretation bulletin is helpful, remember that cryptocurrencies are not Canadian securities under the Income Tax Act.

Reporting as either income or capital gain

Generally, if disposing of cryptocurrency is 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 to sell 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 like 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, the taxpayer has realized a capital gain.

Capital gains from the sale of cryptocurrency are generally included in income for the year. Still, 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.

For more information on capital gains, see Guide T4037, Capital Gains.

Trading cryptocurrency for another type of cryptocurrency

Generally, the barter transaction rules apply when you dispose of one cryptocurrency to acquire another. You have to convert the value of the cryptocurrency you received into Canadian dollars. 

This transaction is considered a disposition, and you have to report it on your income tax return. Report the resulting gain or loss as either business income (or loss) or a capital gain (or loss).

Example 1: Business income or loss

Alice regularly buys and sells various types of cryptocurrencies. She pays close attention to the fluctuations in the value of cryptocurrencies and intends to profit from the changes. Her activities are consistent with someone who is engaged in the business of day trading. In 2017, Alice sold $240,000 worth of various cryptocurrencies, which she originally purchased for $200,000. Her net profit is $40,000. Since Alice is actively trading in cryptocurrency, a commercial activity. She has to report a business income of $40,000 on her 2017 income tax return.

Example 2: Capital gain or loss

Tim found a deal on a living room set at an online vendor that accepts Bitcoin. Tim acquired $3,500 worth of Bitcoin to buy the furniture with. By the time he purchased the table and converted his remaining Bitcoin back into dollars, the value of Tim’s Bitcoin had increased by $500. The gain realized by Tim was on account of capital, so Tim has to report a $500 capital gain on his income tax return. However, only 50% of that capital gain is taxable.

Example 3: Trading one type of cryptocurrency for another

On July 30, 2018, Francis bought 100 units of Ethereum, which had a value of $20,600. For this purchase, Francis used 2.5061 Bitcoins, trading at $8,220 per unit on that day, or the equivalent of $20,600. We consider that Francis disposed of those Bitcoins. Francis originally bought those Bitcoins for $15,000 and exchanged them for 100 units of Ethereum at a value of $20,600, resulting in a capital gain. 

It is calculated as follows:

$20,600 [fair market value of 2.5061 Bitcoins at the time of transaction]

– $15,000 [adjusted cost base of 2.5061 Bitcoins, their original purchase price]

$5,600 capital gain

$5,600 capital gain taxed at 50% = $2,800 taxable capital gain

On the other hand, if the original purchase price of the 2.5061 Bitcoins had initially been $25,000, but when Francis exchanged them for 100 units of Ethereum, they were worth only $20,600, he would have a capital loss. 

It is calculated as follows:

$20,600 [fair market value of 2.5061 Bitcoins at the time of transaction]

– $25,000 [adjusted cost base of 2.5061 Bitcoins, their original purchase price]

$4,400 capital loss

$4,400 capital loss × 50% = $2,200 allowable capital loss

This example assumes that the cryptocurrency in question was held as an investment on account of capital; however, if this transaction occurred in the course of conducting a business, the entire amount of $5,600 would need to be reported as income in the first transaction. The total $4,400 would be reported as a loss in the second transaction.

Earning cryptocurrencies through mining

Cryptocurrencies are commonly acquired in two ways:

  • bought through a cryptocurrency exchange
  • earned through mining

Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. 

Miners will include cryptocurrency transactions into blocks and guess a number that will create a valid block. The corresponding cryptocurrency’s network accepts a valid block. It becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two payments in a single payment amount. 

One payment represents creating a new cryptocurrency on the network. The other payment means the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.

The income tax treatment for cryptocurrency miners depends on whether their mining activities are personal (a hobby) or business activities. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But suppose a hobby is pursued in a sufficiently commercial and businesslike way. In that case, it can be considered a business activity and will be taxed as such.

Valuing cryptocurrencies either as capital property or inventory

To file your income tax return, you need to know how to value your cryptocurrencies. This depends on whether they are considered capital property or inventory. When cryptocurrencies are held as capital property, you must record and track the adjusted cost base to report any capital gains accurately.

If the cryptocurrencies are considered to be inventory, use one of the following 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)

You might have to use other methods of valuing inventory, depending on the type of business you have. For example, the property described in the inventory of a company that is an adventure or concern like trade must be valued at the cost you acquired the property for.

You will have to compare the cost and the fair market value of each item to determine lower. You then use the lower figure for each item (or each class of things if specific items are not easily separated) to calculate the total value of your inventory at the end of the year.

“Cost” as used in the phrase “cost at which the taxpayer acquired the property” means the original cost of the particular item of inventory (for example, a block of cryptocurrency), plus all reasonable costs incurred to buy that specific block of cryptocurrency.

Use the same inventory method from year to year. Please review our archived page on inventory.

For more information on evaluating inventory, including the special rules for an adventure-like trade, please review our archived content on this topic here.

Keeping books and records

If you acquire (by mining or otherwise) or dispose of cryptocurrency, you must keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.

Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, we suggest that you periodically export information from these exchanges to avoid losing the information necessary to report your transactions. You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.

You should maintain the following records on your 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.

If you are a minor, also keep the following records:

  • receipts for the purchase of cryptocurrency mining hardware
  • receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time)
  • the mining pool details and records

Please note that different types of software are available to track cryptocurrency trades and maintain records. The CRA does not endorse any particular software, so choose the kind of software that is best for you to help with your record keeping.

For more information, please review our link on keeping records.

How does the GST/HST apply to cryptocurrency?

Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the cryptocurrency’s fair market value at the time of the exchange.

Suppose your business accepts cryptocurrency as payment for taxable property or services. In that case, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.

Keep all records that show how you calculated the fair market value.

Source: CRA

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