Do you earn, spend, or trade cryptocurrency such as Bitcoin? Although your bank doesn’t keep record of these transactions, digital currencies are considered commodities (like oil or gold) by the Canada Revenue Agency (CRA) and Revenue Québec, meaning you’ll need to report your income or losses on your return as you would any other business or investment transaction.
Here are answers to some common questions to help you understand the tax implications of cryptocurrency
The CRA generally treats cryptocurrency like a commodity for purposes of the Income Tax Act. Any income from transactions involving cryptocurrency is generally 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.
Taxpayers have to establish if a cryptocurrency activity results in income or capital because this affects the way the revenue is treated for income tax purposes. Not all taxpayers who buy and sell cryptocurrency are carrying on business activity.
When you use cryptocurrency to pay for goods or services, the CRA treats it as a barter transaction for income tax purposes. A barter transaction occurs when two parties exchange goods or services and carry out that exchange without using legal currency.
to figure out the value of a cryptocurrency transaction where a direct value cannot be determined, you must use a reasonable method. Keep records to show how you figured out the value.
If you hold 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.
Reporting business income or capital gains from the disposition of cryptocurrency
What is a disposition?
This refers to the way you get rid of something, such as by giving, selling or transferring it. In general, possessing or holding a cryptocurrency is not taxable. But there could be tax consequences when you do any of the following:
Sell or make a gift of cryptocurrency
Trade or exchange cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency
Convert cryptocurrency to government-issued currency, such as Canadian dollars
Use cryptocurrency to buy goods or services
Is it business income or capital gain?
The income you get from disposing of cryptocurrency may be considered business income or a capital gain. In order to report it correctly, you must first establish what kind of income it is.
The following are common signs that you may be carrying on a business:
You carry on activity for commercial reasons and in a commercially viable way
You undertake activities in a businesslike 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
Business activities normally involve some regularity or a repetitive process over time. Each situation has to be looked at separately.
In some cases, a single transaction can be considered a business, for example when it is an adventure or concern in the nature of trade. Whether you are carrying on a business or not must be determined on a case by case basis.
Reporting as either income or capital gain
Generally, if disposing of cryptocurrency is part of a business, the profits you make on the disposition or sale are considered business income and not a capital gain. Buying a cryptocurrency with the intention of selling it for a profit may be treated as business income, even if it’s an isolated incident, because it could be considered an adventure or concern in the nature of trade.
Keeping books and records
If you acquire (by mining or otherwise) or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.
You should maintain the following records on your 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
The 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.
If you are a miner, also keep the following records:
Receipts for the purchase of cryptocurrency mining hardware
Receipts to support your 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
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.
If your 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.
Have more questions about reporting your cryptocurrency transactions on your return? Get help from the network of reliable Tax Experts at GB Solutions