As cryptocurrencies such as Bitcoin or similar digital currencies are a newer innovation, it’s a good idea to be aware of how to meet your tax obligations. Canada’s Senate has reviewed the issue of taxation on cryptocurrency in 2014. Samuel Osei Law Corporation put together a summary of CRA guidelines to help you comply with your tax obligations with the CRA.
How does the CRA view cryptocurrencies for income tax reporting?
Cryptocurrency is treated like a commodity for CRA purposes of income tax. Cryptocurrency income coming in is treated as business income or capital gain. Any losses can be also treated as a business loss or a capital loss. As the taxpayer, you need to determine if your cryptocurrency is business income or capital.
Reporting business income or capital gains when buying, selling, or transferring cryptocurrencies.
In general, if you’re holding cryptocurrency, it’s not taxable. There could be tax consequences if you do any of the following:
- Sell or make a gift of cryptocurrency
- Trade or exchange of cryptocurrency
- Converting cryptocurrency to Canadian dollars or other government-issued currency
- Buy goods or services with cryptocurrency
How do I know when to report as income or capital gain?
To report your cryptocurrency as business income or capital gain, you need to establish what kind of income you have.
Are you carrying on a business? Generally, if disposing of cryptocurrency is part of the business, your profits are considered business income and not capital gain.
Buying cryptocurrency with the intention of selling it for a profit could be considered business income.
If the sale of the cryptocurrency isn’t part of a business, and you end up selling the amount over the original purchase price, then you have realized a capital gain. Only half of the capital gain is subject to tax — the taxable capital gain. Keep in mind that any capital losses resulting from the sale can only be offset against capital gains. You can’t use them to reduce other income such as employment income. You are able to carry forward any capital losses if you don’t have capital gains to offset the loss for the year or any of the three preceding years.
Trading cryptocurrency for another type of cryptocurrency
If you trade one type of cryptocurrency for another, barter transaction rules apply. You must convert the value of the cryptocurrency into Canadian dollars and report as a gain or loss either as business income (or loss) or capital gain (or loss).
What if I earn cryptocurrency through mining?
Other than earning cryptocurrencies through transactions, cryptocurrencies can also be acquired through mining by using specialized computers.
For any cryptocurrencies that are acquired through mining, income tax treatment depends on whether the mining activities are done as a personal hobby or as a business activity. This is determined on a case by case basis. If the hobby is sufficiently commercial, it can be considered a business activity. Once it’s considered a business activity, it will be taxed as such.
How to value cryptocurrencies either as capital property or inventory
When you file your income tax return, you need to know whether to value your cryptocurrency as capital property or inventory. If the cryptocurrency is a capital property, you must record and track the adjusted cost base so that you can report any capital gains.
If the cryptocurrencies are considered to be inventory, you can use one of these two methods for valuation:
- Each item in the inventory is valued at cost when it was acquired or its fair market value at the end of the year.
- The entire inventory is valued at its fair market value at the end of the year.
What information do I need to keep records?
After any cryptocurrency transaction (or for acquisitions by mining), you must keep records. Different exchanges have different standards of reporting and record keeping so it’s a good idea to export the information from the exchanges and keep your own records to avoid losing information necessary to report your transactions. There are different software available to help you track cryptocurrency trades and maintain records.
It’s your responsibility to keep all required records and supporting documents for at least 6 years.
Here’s the information you should keep recorded:
- Receipts of purchases or transfers
- Date of transactions
- Value in CAD at the time of the transaction
- Digital wallet records
- Cryptocurrency addresses
- Exchange records
- Accounting and legal costs
- Software costs (relating to managing your taxes)
If you mine cryptocurrencies you should also keep the following records:
- Receipts for hardware
- Expense receipts for the mining operation (for example, power costs, maintenance costs, mining pool fees, etc)
- Mining pool details and records