Investing in cryptocurrencies is becoming more mainstream, particularly in Canada with its supportive regulatory environment for new and innovative financial products.
The Canada Revenue Agency generally treats cryptocurrencies as commodities, not currency (the same goes for the U.S. Internal Revenue Service). Therefore, “any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances,” the CRA states.
And when crypto is used to “pay” for goods and services, the CRA considers someone to be bartering, and “not reporting income from such transactions is illegal.”
But the tax treatment of cryptocurrency is “an evolving situation,” said Mehran Sedigh, a CPA and managing partner at Triple M Professional Corp. in Richmond Hill, Ont. In his experience, crypto “was getting treated as a commodity, but now it is being treated as a liquid asset of some sorts,” he said.
Whether earnings from crypto are considered business income or a capital gain depends a lot on the holder’s behaviour, said Sedigh. For a long-term holder, crypto is more likely to be treated as a capital asset (and earnings as a capital gain). But if the holder actively trades crypto, then crypto is more likely to be considered active business inventory, with any earnings considered business income, Sedigh said.
Which events are taxable?
Owning cryptocurrency itself is not taxable. But, according to the CRA, there could be tax consequences for doing any of the following:
- selling or gifting cryptocurrency;
- trading or exchanging cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency;
- converting cryptocurrency to government-issued currency, such as Canadian dollars;
- using cryptocurrency to buy goods or services.
For example, say your client owes their accountant $50,000 and pays the accountant in Bitcoin. The client bought one coin when it was worth $30,000 and it’s now worth the full $50,000 of that accountant’s bill. “That $20,000 increase in value, from the time you purchased it to the time that you paid the bill with it, would be considered a gain,” Sedigh said.
The big question is whether that $20,000 gain is income or a capital gain.
The CRA would consider the gain to be business income if the activities the client engaged in “involve some regularity or a repetitive process over time.” Those activities could include cryptocurrency mining and trading, as well as creating and selling non-fungible tokens, Sedigh said.
David Rotfleisch, a tax lawyer with Rotfleisch & Samulovitch P.C. in Toronto, said several factors must be considered when deciding if the gains are income or not. If the client bought the cryptocurrency five years ago and disposed of it for profit today, the CRA would probably view the gain as a capital gain, of which 50% is taxable. Like Sedigh, Rotfleisch suggested that a client continuously trading crypto would most likely generate business income.
“But there’s no bright-line test,” Rotfleisch said, so every case needs to be analyzed.
Rotfleish said he counsels cryptocurrency miners who “earn” fully taxable business income to incorporate so they “pay tax at small business rates, which is half the regular personal rate.”
Other tax issues to note
If a business trades goods or services for cryptocurrency, GST/HST must be collected from the purchaser. The amount is calculated on the fair market value of the crypto at the time of the transaction.
Similarly, if someone is paid wages in cryptocurrency, they should record the value in Canadian dollars on the day they got paid and report that amount when filing personal income taxes.
While none of the tax aspects surrounding cryptocurrency is straightforward, coin-to-coin trades are particularly complicated. Some people sell, say, Bitcoin to buy Ethereum and then dispose of the Ethereum to acquire Cardano, Rotfleish said. In such cases, every transaction needs to be recorded, and the amounts often need to be converted from U.S. dollars to Canadian dollars. A taxpayer would need to be able to appropriately report gains and losses at the end of the year.
“Record-keeping is a massive problem for a lot of these guys,” Rotfleish said. “So sometimes a large part of our job is helping the clients to reconstruct their trading history records.”
Sedigh said traders (be they hobbyists or day traders) should pull their data from exchanges weekly because many of the exchanges only keep trading information for a few months. Furthermore, some exchanges are startups that could shut down, taking users’ info with them. In addition to official recordkeeping, he recommended taking “screenshots whenever they can, just to make sure they have a full paper trail.”
Solid documentation also helps if traders have lost money because they can claim those losses on their taxes, Sedigh added.