The cryptocurrency wave has become a global movement, with many Canadian companies and individuals participating in the space.
Cryptocurrency has rapidly risen in popularity and as a result, there are still a lot of gray areas when it comes to capital gains and taxes.
The Canada Revenue Agency (CRA) has provided some guidelines on how crypto should be treated with respect to income tax.
Is Crypto Taxable in Canada?
If you’re wondering whether your income from crypto can be taxed, the simple answer is yes.
Cryptocurrency is a digital asset that is treated as a commodity for tax purposes.
Because cryptocurrency is not considered to be a legal tender, when it is used to purchase goods or services, it is deemed to be a barter trade.
The following crypto activities can trigger a tax situation in Canada:
- If you sell a crypto asset;
- If you give someone a cryptocurrency gift;
- If you buy, sell, or exchange cryptocurrency;
- If you use crypto to purchase goods or services;
- If you convert your cryptocurrency to Canadian dollars.
Depending on the circumstances of the trade or disposal, any income generated from cryptocurrency is treated either as business income or as capital gains and will be taxed as such.
Reporting Crypto Transactions as Business Income
Due to the different tax treatments involved, it is important to distinguish if income from crypto transactions is business income or capital gains.
To determine if crypto transactions result in business income, you need to assess if the crypto activities were for commercial reasons or carried out in a commercially viable way.
Also, if the crypto transactions were done in a business-like manner, and involved processes that a business would usually undergo, it may be considered to be a source of business income.
For example, if you had to prepare a business plan and purchase capital assets, inventory, or other working capital for the purpose of your crypto transactions, then it can be considered to be a source of business income.
Additionally, if as a result of carrying out crypto activities, you sell or promote a crypto product or service with the intent to realize profit, you may be carrying out crypto business activities.
Most crypto mining, trading, or exchange processes are considered to be run as a business, and thus generate business income.
Frequent and regular processes carried out for crypto trading may qualify as a source of business income and will need to be reported as such in your income tax return.
Generally, crypto assets held for business purposes may qualify as inventory.
These crypto inventories have to be valued appropriately.
When you carry out your crypto inventory valuation process, you need to use a consistent method every year.
You can choose to calculate the value of your crypto asset using one of the following methods:
- Use the lower value of: (i) the purchase cost of each crypto asset, or (ii) the fair market value (FMV) of each crypto asset at the end of the year.
- Use the fair market value for the entire crypto inventory at the end of the year. This will usually be determined as the price you can replace or sell the crypto assets for.
Reporting Crypto Transactions as Capital Gains
If your cryptocurrency transaction is not considered to be a business, then any income generated will be treated as capital gains.
Most times, the crypto activity will need to be assessed on a case-by-case basis to determine if it is a capital gain and not business income.
If your cryptocurrency is held as a capital asset, then your capital gain on disposal will be calculated as the difference between the market value (or sale price) of the asset and the adjusted cost base —the cost of purchase plus any expenses incurred to acquire the asset.
Similar to other types of capital gains, you will need to report your total cryptocurrency capital gains to the Canada Revenue Agency using the Schedule 3, Capital Gains (or Losses) form.
Your taxable crypto gain will be half (50 %) of your total gain.
You can offset your cryptocurrency gains with any crypto losses to arrive at your net capital gains, and you are allowed to carry forward any unused capital losses.
What About Mining?
Cryptocurrency can be acquired either through purchase from a crypto exchange or by mining it.
When crypto is mined, the income will be taxed based on the intent of the mining activity.
For tax purposes, mining activity can either be treated as a personal hobby or a business transaction.
However, there may be instances where intended mining activities may be considered to be business-like.
For example, even if the mining activity is a personal hobby that drives pleasure and fun, if it is approached for significant commercial purposes, then it will be recognized as business income and taxed accordingly.
If you make crypto income through business activities, mining, or investing, you will need to keep adequate records of your transactions in case the CRA requests to audit them.
Some documentation that you should keep are transaction dates, transaction descriptions, receipts, digital wallet records, cryptocurrency addresses, any accounting and legal costs, crypto mining pool details and records, etc.
