So, you invested in crypto. By most accounts, you are not alone. And while this is a hot topic, many people still don’t fully understand and grasp the consequences of investing in cryptocurrencies. The guides on Reddit and the internet just don’t explain everything you need to know. So, we created this easy-to-read guide to help anyone who is either just about to buy their first crypto investment or are looking at diversifying their portfolio.
What’s all the buzz about?
Cryptocurrency has become one of the hottest investment options in the last year. Many people are attracted to the exciting potential of this pioneering, decentralized technology. However, there is one major thing holding people back: The Unreliable Income Tax Conundrum.
For tax purposes, crypto is not currency. Crypto is property and a business asset (like stocks). The CRA has issued guidance on how taxpayers should report transactions involving virtual currency. When you buy or sell cryptocurrency, it’s taxable just like most property transaction.
Taxes For Cryptocurrencies
Cryptocurrency creators (Bitcoin, Dogecoin) set up these currencies as systems separate from any central bank, central authority, or government influence. However, cryptocurrencies are still considered commodities for the purposes of the Income Tax Act. In other words, when you receive Dogecoin and use it to purchase goods or services, the CRA considers this as a barter transaction. The CRA requires you to report any earnings or losses from these transactions on your income tax return.
The Key Tax Questions
How do I calculate capital gains or losses?
When you sell a cryptocurrency for more than what you paid, the difference is considered a capital gain. If you sell for less, then this difference is considered a capital loss.
If you are the one who has sold a cryptocurrency for more than what you paid, then you owe taxes on this capital gain. If you are the one who paid less, then this is considered a capital loss. Capital losses are deductible against other capital gains.
What if I bought a cryptocurrency from someone else?
When you buy a cryptocurrency, either directly or indirectly from someone else (for example, on an exchange), then the CRA treats this as a barter transaction. Since the value of the cryptocurrency has increased, any capital gains will be realized on the date you sold it.
If you are the one who bought the cryptocurrency and sold it for more than what you paid, then you owe taxes on this capital gain. If you are the one who paid less, then this is considered a capital loss. Capital losses are not deductible on your tax return like income losses.
What if I trade cryptocurrency for another type of cryptocurrency?
When you trade one cryptocurrency for another type of cryptocurrency, the CRA considers this a barter transaction. Since the value of the cryptocurrency has increased, any capital gains will be realized on the date you sold it.
If you are the one who traded cryptocurrencies for another type of cryptocurrency and sold that one for more than what you paid, then you most likely owe taxes on this capital gain. If you are the one who paid less, then this is considered a capital loss. Capital losses are not deductible on your tax return like income losses.
Let’s look at some examples pulled from the CRA’s Guide for cryptocurrency users and tax professionals:
Let’s move along into other aspects of cryptocurrency.
Crypto mining is the process of verifying transactions on a blockchain ledger by solving mathematical problems. In this way, a miner creates new cryptocurrency, which is then added to the digital ledger.
To mine cryptocurrencies, you need a powerful processing unit like an ASIC, or Application Specific Integrated Circuits. The processing power that ends up being used for this purpose is called hashing power (commonly expressed in megahashes per second). The faster your computer can compute hashes, the better chance you have of earning more bitcoins or other cryptocurrencies.
When it comes to cryptocurrency mining, it’s a good idea to keep your capital loss and income loss separate. Capital losses can be used to offset capital gains, while income losses are deductible against any type of taxable income.
OK. So, what about taxes when earning cryptocurrency?
“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. 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.” – from the CRA’s Guide for cryptocurrency users and tax professionals
Individuals who are income tax residents of Canada are taxed on their worldwide income, including any income earned from cryptocurrency mining. Be aware that due to the large fluctuations in daily activity across trading platforms, tax authorities may take the average of the opening and closing values of the day, and also average values across a number of major exchanges.
What is income tax for business activity and does it apply to my mining operation?
The Income Tax Act describes income as the total of all amounts, monetary or not, that a person receives for any purpose. What this means is that all amounts are subject to income tax, even if there is no cash involved. This applies to cryptocurrency mining.
Since every business activity has to report income and expenses, the first step in determining your tax liability is to determine whether your cryptocurrency mining activity is a business activity or not. Therefore, you need to determine whether:
Your cryptocurrency mining activities are carried out in a sufficiently commercial and businesslike way; and You have acquired the necessary skills and knowledge that would allow you to carry on these activities as a profession or business.
What is the income tax treatment for crypto miners?
The CRA has indicated that cryptocurrency mining is a taxable business for Canadian tax purposes due to the fact that miners generate revenue from the sale of cryptocurrencies.
For additional information on how you can calculate your mining expenses and determine what kind of income tax treatment you should receive, please contact us today.
What about GST/HST?
From the CRA’s Guide for cryptocurrency users and tax professionals:
“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.
Keep all records that show how you calculated the fair market value.”
For additional information on how you can calculate your GST/HST, please contact us today.
What about bookkeeping?
“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.” – from the CRA Guide for cryptocurrency users and tax professionals
From the same CRA guide, please see below:
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
To sum up, the CRA expects you to keep track of all your cryptocurrency transactions. Get in touch with us today should any of the above speak to you – or if you just need help with understanding your specific situation. If you would like to learn more about how Elevate by Welch can help with bookkeeping and tax services for cryptocurrency, contact Sean at sduff[email protected]
The information contained in this article is for general purposes only. It does not constitute legal or tax advice and is not intended to provide specific answers for any individual situation.