The Purpose of this Guide
The purpose of this Canadian cryptocurrency taxation guide is to help you identify if you have triggered a taxable event to report on your Canadian tax return from cryptocurrency activities. The cryptocurrency environment is constantly evolving; therefore, this is a guide of the basics. As of January 1, 2022; the CRA has released limited guidance for the tax treatment of cryptocurrency. The information below may be subject to change based on new developments from the CRA after January 1, 2022.
Please note this is not tax advice, please do your own due diligence. We recommend consulting the advice of an expert when evaluating your specific tax situation. I am a CPA and run an accounting firm providing cryptocurrency tax services to individuals and corporations across Canada, I am always happy to assist and take on new clients https://www.tsbcpa.ca/
How the CRA Views Cryptocurrency
According to the CRA:
“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 also states that they view cryptocurrency as a commodity for tax purposes, so any income is either treated as capital gains or business income depending on the circumstances; we will discuss this further in this guide.
Since the CRA does not currently view cryptocurrency as legal tender, when you pay for a good or service with cryptocurrency it is treated as a barter transaction, which is the exchange of one good or service for another. Generally, this means the value in Canadian dollars of the good or service you received may be used to determine the value of the cryptocurrency you spent. This value in Canadian dollars will be used to calculate if you are subject to additional taxable income on the cryptocurrency you spent if you had originally purchased it for a higher or lower amount. In some instances the value of the cryptocurrency exchanged is more readily available and will be used to determine the transaction price.
The vendor receiving the cryptocurrency as payment would report taxable income based on the value in Canadian dollars determined by the barter transaction, the cost base of the cryptocurrency received will also be equal to this amount.
Taxable Transactions
Taxable events will require reporting on your tax return; therefore, it is important to understand the timing of taxable events and how they are triggered. Generally, a taxable event is triggered when your disposition amount is higher or lower than your cost base. In the most simplified terms, the amount you paid for your cryptocurrency will usually be its cost base.
Each type of cryptocurrency holds its own specific cost base, it is not lumped together with other types of cryptocurrencies. For example, the total cost base of your Bitcoin is tracked separately from the total cost base of your Ethereum.
The following transactions are taxable events which will trigger dispositions of cryptocurrency:
● Selling or gifting a cryptocurrency;
● Exchanging cryptocurrency for another type of cryptocurrency or stable coin;
● Exchanging cryptocurrency for fiat currency (eg. CAD);
● Using cryptocurrency to purchase goods or services;
● Exchanging cryptocurrency for an Initial coin offering;
● Yield farming and other DeFi activities;
● Losing cryptocurrency to a bankrupt exchange; e.g. Quadriga - additional elections required.
For example:
- You purchase Bitcoin for $100 Canadian dollars;
- The value of the Bitcoin you purchased rises to $150 Canadian dollars;
- You exchange all of this Bitcoin worth $150 Canadian dollars for Ethereum;
- You have triggered a disposition on the exchange of the Bitcoin to Ethereum and created income of $50 that will need to be reported for tax purposes. This income is calculated as the disposition amount of $150 minus your cost base of $100;
- The cost base of the Ethereum purchased is $150 Canadian dollars, this increase in the cost base ensures you are not double taxed on future dispositions.
If you have completed any type of transaction above, it is very likely you have triggered a taxable event that must be reported on your tax return. This is further supported when we consider how volatile cryptocurrency can be and how fast values change after purchase. Depending on your situation the taxable event will be treated as a capital gain/loss or business income/loss.
Many individuals believe that tax can only be triggered when cryptocurrency is converted back to fiat, this view is incorrect and will result in being offside with the CRA. Sending cryptocurrency to your own wallet or an exchange you use is not a taxable event as a disposition did not occur. Tax consequences will occur for transactions where your cost base of the cryptocurrency is greater than or less than the disposition value.
Business Income vs. Capital Gains
The income you receive from disposing of cryptocurrency may be considered business income or a capital gain. The tax treatment differs depending on how the income is classified. Whether the income should be classified as business income or capital gains is a determination based on the facts of your specific situation.
If you are considered to be in the business of trading cryptocurrency, the cryptocurrency will be held as inventory and 100% of the income is taxable. You may also deduct the associated expenses incurred to earn that income.
With capital gains treatment, only 50% of the income earned is taxable. The capital gain is calculated as your net proceeds of disposition minus the adjusted cost base.
There are multiple factors the CRA looks at to determine whether your income is a result of a business or capital. This is not a one size fits all approach, an analysis should be conducted by a CPA for each individual’s situation. However, the CRA indicates that some of the key areas to consider when determining whether your crypto activities will be considered a business activity are:
● You carry on activity for commercial reasons and in a commercially viable way;
● You undertake activities in a business like 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.
The CRA also notes that taxpayers may review the CRA’s general guidelines for security transactions when evaluating whether income from cryptocurrencies should be classified as business income or capital gains. The CRA cautions that cryptocurrencies are not Canadian securities under the income tax act, however, the guidelines may still be helpful to determine if an individual is a trader in cryptocurrencies that earns business income. Please see the 8 factors in paragraph 11 of CRA page “IT479R ARCHIVED - Transactions in securities”.
Generally, if you are buying cryptocurrency with the intention to invest and you trade infrequently, there may be a strong case to classify any income earned as capital gains for tax purposes. However, if you are actively trading cryptocurrency the CRA may deem you to be carrying on a business and income earned will be taxed accordingly. This can be a complex analysis with many variables to keep in mind.
Cryptocurrency Mining
According to the CRA, cryptocurrency mining is explained as follows:
“Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. Miners will include cryptocurrency transactions into blocks, and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrency’s network and 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 the creation of new cryptocurrency on the network and the other payment represents 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 tax treatment of cryptocurrency mining differs depending on the circumstances. The CRA will either view mining activities as a business or as a hobby, the appropriate tax treatment depends on this classification.
Business Classification
If you are mining cryptocurrency with the intention to make a profit, the activities may be considered a cryptocurrency mining business. Therefore, the cryptocurrency you receive from mining will be taxed as business income. However, you will be entitled to a corresponding deduction for the expenses associated with your cryptocurrency mining activities. Examples of expenses may include computer hardware, rent, electricity, internet, etc. CRA has provided limited guidance in regard to the timing of recognizing revenue from cryptocurrency mining, however, CRA stated in technical interpretation 2018-0776661I7 dated August 8, 2019:
“In our view, Bitcoin received by a miner to validate transactions is consideration for services rendered by the miner. Where a taxpayer is in the business of Bitcoin mining, the Bitcoin received must be included in the taxpayer’s income at the time it is earned under section 3 and section 9 of the Income Tax Act.”
The timing of when to recognize revenue and expenses can be complicated, we recommend discussing your mining activities with a CPA firm to ensure the mining income is reported correctly.