Capitalizing on Cryptocurrency in Canada

Oct 17, 2019

byNDAX Labs

Capitalizing on Cryptocurrency in Canada

The cryptocurrency landscape has exploded in its first ten years. As cryptocurrencies like Bitcoin continue to grow in terms of user awareness and adoption, a regulatory framework for the digital assets has been developing in Canada for several years. In order for Canadian traders and investors to fully understand the Canadian crypto space, it is critically important that they know the regulatory framework surrounding digital currencies in Canada. In this article, we explore how the Canadian Government treats cryptocurrencies in terms of taxes.

Please Note: Much of the information in this blog is taken directly from the Canadian Government and the Canada Revenue Agency (CRA). You can refer to the Government of Canada’s official website for additional information.

The Canada Revenue Agency generally treats cryptocurrency as a commodity for purposes of the Income Tax Act. Any income from transactions involving cryptocurrency is usually treated as business income or as a capital gain, depending on the circumstances. Similarly, if earnings qualify as business income or as a capital gain, then any losses are treated as business losses or capital losses (Canada Revenue Agency, 2019).

Taxpayers must calculate if their cryptocurrency activity results in income or capital because this affects the way the revenue is treated for income tax purposes. In the eyes of the CRA, not all taxpayers who buy and sell cryptocurrency are carrying on business activity (Canada Revenue Agency, 2019).

When cryptocurrency is used to pay for goods or services, the CRA treats the exchange as a barter transaction. A barter transaction occurs when two parties exchange products or services and carry out that exchange without using legal currency (Canada Revenue Agency, 2019).

To figure out the value of a cryptocurrency transaction where a direct value cannot be determined, Canadians must use a reasonable method of valuation. The CRA recommends that taxpayers keep their transaction records to show how the value of their cryptocurrencies was calculated (Canada Revenue Agency, 2019).

The CRA’s official 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 who are acting independently of each other, would agree to in an open and unrestricted market.

For example, a taxpayer can choose an exchange rate taken from the same exchange broker or an average of midday values across several high-volume exchange brokers. Whichever method is selected, the CRA recommends that taxpayers use it consistently (Canada Revenue Agency, 2019).

When holding 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. For example, a Bitcoin is valued separately from a Litecoin (Canada Revenue Agency, 2019).

Cryptocurrency Capital Gains and Losses

Cryptocurrency capital gains are taxed like any other financial investment in Canada. Fifty percent of the profits are taxable and added to taxable income for that year (Canada Revenue Agency, 2019).
For example, if someone bought $10,000 of Bitcoin and sold it for $15,000, then the taxable capital gain would be ($15,000 – $10,000) (50%) = $2,500. The $2,500 would be added to a person’s income for the year at their marginal tax rate. For example, if a person has a marginal tax rate of 30%, then the tax due on the sale of Bitcoin would be $2,500 (30%) = $750.
This method of taxation applies to normal buy and hold investors. Traders that buy and sell cryptocurrencies in high volumes might be considered by the CRA to be in the business of trading. In that scenario, taxes paid by high volume traders would be categorized and calculated using Canada’s corporate tax framework (Canada Revenue Agency, 2019).

Trading cryptocurrency in your TFSA and RRSP

Currently, the tax system prevents Canadians from trading cryptocurrency in their TFSA and RRSP. A Canadian cannot transfer Bitcoin or other altcoins into their TFSA or RRSP (Canada Revenue Agency, 2019).

Buying goods or cryptocurrencies with cryptocurrency

Canadians are required by law to keep records of any financial trades they make. Having these records is vital in terms of reporting any capital gains or losses. Capital gains can be made in more than one circumstance (Canada Revenue Agency, 2019).
For example, imagine a Canadian bought one Bitcoin for $100, but then the current market value of Bitcoin went up to $10,000. Then imagine that the same person decides to use their single Bitcoin to buy a piece of artwork from an art dealer worth $10,000.
In this example, both parties involved in the purchase of the art are liable for taxes. The original owner of the Bitcoin owner would pay capital gains taxes on $4,950 (50% of $9,900). The person selling the art would need to report the $10,000 as revenue.
When someone purchases cryptocurrencies at different times or prices, they need to keep a record of all those transactions and calculate their adjusted cost base when selling the cryptocurrencies later (Canada Revenue Agency, 2019).

Moving cryptocurrency from one wallet to another

When a Canadian moves their cryptocurrency from one wallet to another (or their own wallet) then it is not a taxable event as long as they did not sell any of the cryptocurrency in the process (Canada Revenue Agency, 2019).
If a person pays a $10 transfer fee to move cryptocurrency from one wallet to another, then that $10 transaction cost can be deducted from their capital gains. Any fee incurred in the buying or selling of cryptocurrency can also be deducted from capital gains (Canada Revenue Agency, 2019).

What happens if a Canadian does not report their cryptocurrency gains?

Not reporting any capital gains, losses, or revenue from cryptocurrencies is considered tax evasion and is illegal in Canada. Tax evasion can lead to fines, interest payments, and possibly jail time. As cryptocurrencies continue to become more heavily adopted in the Canadian market, the CRA is monitoring the space very closely (Gill, 2019).

Cryptocurrencies valuation upon separation

In general, the CRA concludes that cryptocurrency assets are valued and divided in accordance with the rules regarding family property. However, the valuation of cryptocurrencies in a separation is a complex issue (Gill, 2019).
As Canadian law firm McKercher LLP describes “some cryptocurrencies have an associated CAD or USD price, while others only have a value relative to a larger cryptocurrency. Furthermore, given the volatility in cryptocurrency values, parties ought to mutually agree to a specific time of valuation, as the value at the date of petition may alter significantly from the date of adjudication (Gill, 2019).”

Leaving Cryptocurrency to a Beneficiary or Estate

Because cryptocurrencies are taxed as a commodity in Canada, the assets can be included in an individual’s will or as part of an estate (Gill, 2019).
According to the legal experts at McKercher LLP, “The real issue in leaving digital currencies to a beneficiary is how they will be accessed after one’s passing. All cryptocurrency accounts are protected by a private key and would be inaccessible and inactive without it. The simple way to address this issue is to ensure that the wallet is declared as an inheritable asset and to entrust the private key to the advisor of the estate, with specific instructions on how to access the account (Gill, 2019).”

Earning cryptocurrencies through mining

The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity (a hobby) or a business activity. This is decided case by case (Canada Revenue Agency, 2019).
A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such (Canada Revenue Agency, 2019).

Valuing cryptocurrencies either as capital property or inventory

Canadians need to know the value of their cryptocurrencies depending on whether they are considered capital property or inventory (Canada Revenue Agency, 2019).
When cryptocurrencies are held as capital property, the adjusted cost based must be tracked and recorded to report any capital gains accurately (Canada Revenue Agency, 2019).

If the cryptocurrencies are considered to be inventory, one of the following two methods can consistently value inventory from year to year (Canada Revenue Agency, 2019):
- 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 (Canada Revenue Agency, 2019)
- Value the entire inventory at its fair market value at the end of the year (generally, the price someone would pay to replace an item or the amount that would be received if an item is sold) (Canada Revenue Agency, 2019)
Other methods of valuing inventory can be used depending on the type of business. For example, property described in the inventory of a business that is an adventure or concern in the nature of trade must be valued at the cost the property was acquired for (Canada Revenue Agency, 2019).
A comparison of the cost and the fair market value of each item can be used to figure out which is lower. The lower figure is used for each item (or each class of items if specific items are not easily separated) to calculate the total value of the inventory at the end of the year (Canada Revenue Agency, 2019).
"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 particular block of cryptocurrency (Canada Revenue Agency, 2019).
The same method for calculating inventory should be used from year to year.

Keeping books and Records

If a Canadian acquires (by mining or otherwise) or disposes of cryptocurrency, records of cryptocurrency transactions need to be kept. This also applies to businesses that accept cryptocurrency as payment for goods and services (Canada Revenue Agency, 2019).
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If a taxpayer uses cryptocurrency exchanges, it is strongly recommended that the information exported from these exchanges be kept periodically to avoid losing the information necessary to report cryptocurrency transactions. A taxpayer is 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 (Canada Revenue Agency, 2019).
The following records of cryptocurrency transactions should be kept:
- Date of the transactions
- Receipts of purchase or transfer of cryptocurrency
- Value of the cryptocurrency in Canadian dollars at the time of the transaction
- Digital wallet records and cryptocurrency addresses
- A description of the transaction and the other party (even if it is just their cryptocurrency address)
- Exchange records
- Accounting and legal costs
- Software costs related to managing tax affairs (Canada Revenue Agency, 2019)
- For cryptocurrency miners, the following records should also be kept:
- Receipts for the purchase of cryptocurrency mining hardware
- Receipts to support and report 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. It recommends that traders choose the kind of software that is best for them in helping with record keeping (Canada Revenue Agency, 2019)

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 fair market value of the cryptocurrency at the time of the exchange (Canada Revenue Agency, 2019).
If a business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction (Canada Revenue Agency, 2019).
All records that show how fair market value was calculated (Canada Revenue Agency, 2019).

Canada Revenue Agency. (2019, June 27). Guide for Cryptocurrency Users and Tax Professionals. Retrieved from https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html

Gill, J.A. (2019, April 4). A Beginner’s Guide to Canadian Cryptocurrency Regulation. Retrieved from http://www.mckercher.ca/resources/a-beginners-guide-to-canadian-cryptocurrency-regulation

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