Tax Guide: Cryptocurrency and Bitcoin taxes in Canada
Have you bought or sold cryptocurrency in the last fiscal year?
As the end of the year approaches, we begin to prepare ourselves for the 2020 tax season. As a Canadian taxpayer, calculating your taxes, finding what reporting and filings are needed poses a diverse set of requirements and challenges.
While we cannot give tax advice, we want to provide you with the information you need to make you feel more comfortable this tax season. Below is a summary of the CRA's 20190617 bulletins provided as a guide to help Canadians in their preparations for taxes.
Step 1: Understanding CRA Guidelines
As cryptocurrency is new to Canadians, taxpayers are looking for tax guidelines on how to submit their taxes and ensure they are compliant with the rules.
The Canadian Revenue Agency defines Cryptocurrency as "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. Strong 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."
This narrative outlines the income tax implications of everyday transactions involving cryptocurrency. When cryptocurrency is referenced in this publication, the reference concerns Bitcoin, or other similar virtual currencies.
Step 2: Tracking
If you hold more than one cryptocurrency asset in a digital wallet, each asset will be considered independent and must be valued separately. For example, your bitcoin holdings are valued separately from your Litecoin holdings.
Cryptocurrency exchanges hold different criteria when it comes to the trade records they keep and how long they store information. It is recommended that you export information from cryptocurrency exchanges periodically to avoid losing any necessary information needed to report your transactions. It is your responsibility to keep all the required records and supporting documents for at least six years.
You should keep the following records for all 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
- • 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.
Step 3: Valuation
When finding a cryptocurrency transaction's value, keep a record proving how you chose and quantified the value. The CRA positions the reasonable value as the highest price, expressed in dollars that a willing buyer and seller that 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 the exchange rate from the platform you are using to trade on or an average of midday values across several high-volume trading platforms. Be consistent with the method you choose to record all your cryptocurrency transactions.
Step 4: Treatment
Taxpayers must establish if cryptocurrency transactions and activity should be treated as income or capital - this is treated differently for income tax purposes.
Not all taxpayers who buy and sell cryptocurrencies are carrying on business activity.
Income tax treatment is different than a barter transaction scenario if a taxpayer chooses to buy and sell Bitcoin and other cryptocurrencies to make a profit.
You can compare Bitcoin to a piece of property. When sold for a higher price than what was paid for, a capital gain will arise, and one half of the revenue will be included in the taxpayer's income.
Complexities can arise if this type of transaction is executed several times over the taxation year. For example, if a taxpayer repeatedly buys and sells Bitcoin to gain a profit, the CRA may conclude that the taxpayer is in the business of speculating on Bitcoin and includes all profits in the taxpayer's income as business income instead of a capital gain.
Step 5: Reporting
Reporting cryptocurrency on tax returns will be needed if specific criteria are met. In general, however, owning or holding a cryptocurrency is not taxable.
Tax consequences could arise when any of the following occurs:
- • When you sell or make a gift of cryptocurrency
- • Trade or exchange cryptocurrency, including disposing of one cryptocurrency to obtain another
- • Convert cryptocurrency to fiat, such as the Canadian dollar
- • Use cryptocurrency to buy goods or services
How do I treat the taxation on earning cryptocurrencies through mining?
- If you do consider engaging in mining, per the CRA 20190617 bulletin, keep a record of:
- • receipts for the purchase of cryptocurrency mining hardware
- • receipts to support your expenses and other documents 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
Does GST (and other sales taxes) apply to cryptocurrency?
- Per CRA's guidance, zero-rated services are exempt from the GST application. An example of a zero-rated service that would suggest GST exemption for cryptocurrencies would be financial services.
What are the tax consequences for trading cryptocurrencies for one another ?
- When you dispose of one type of cryptocurrency to buy another cryptocurrency, the barter transaction rules apply. You must convert the value of the cryptocurrency you received into Canadian dollars. Transaction considering a disposition requires disclosure of your income tax return accordingly, as either a gain/loss on operating income or a capital gain/loss arises, depending on the circumstances at play.
What are the tax implications for gifting cryptocurrencies?
- CRA has stated a $500 limit for gifts. The gifted cryptocurrencies are valued using reasonable value when gifted (not at the time of year-end).
- You may give an unlimited number of gifts with a combined total value of under $500 or less annually. If the reasonable value (fair market value) of the gifts and awards you give your employee is more than $500, the amount over $500 will be taxable. For example, if you receive cryptocurrency gifts with a total reasonable value of $650, there will be a tax implication on the excess $150 ($650-$500).
"This blog is for informational purposes only, and not to be used for tax determinant purposes. Please refer to Canada Revenue Agency's bulletins for tax guidance."
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