The volatility of cryptocurrency is well-known. Holding assets such as Bitcoin can result in huge gains in value over a relatively short duration. It can also result in huge losses.
As the holding of cryptocurrency is becoming more common, thoughts have turned to how such assets are treated from a tax perspective.
The CRA has released many information guides in relation to the taxation of cryptocurrency, to help investors, traders and “miners” understand their tax obligations. These guides can be found here.
The taxation of cryptocurrency generally follows basic taxation principles, as with any other asset. Cryptocurrency is treated as a commodity for tax purposes. The tax implications are determined by the reason that the cryptocurrency was acquired and/or the use to which it is put.
Investment
Given the volatile history of cryptocurrency such as Bitcoin, speculative investors can be attracted to purchasing crypto to hold, in the hope of experiencing booming growth in value, similar to that of the past. For these investors, provided that the holding is not part of a business activity (discussed below), the holding is likely to be treated as a capital asset.
Therefore, any growth in value of the holding will likely be subject to capital gains treatment. No tax should be payable until the holding is sold. Once sold, currently one-half of any gain arising would be subject to income tax.
In the event of selling the holding for a loss, one-half of the loss should be treated as an allowable capital loss, which is offset against any capital gains arising in the same year. Any remaining allowable loss should be able to be carried back to be offset against capital gains arising in any of the three previous tax years, or carried forward indefinitely.
Trading
Whether a person is considered to be a cryptocurrency trader is dependent upon that person’s specific circumstances.
If a person buys crypto with the intention to make a profit, this is an indicator that they may be trading. Other indicators include the frequency of trades and the commercial nature of the activity (for example, does the individual spend significant periods tracking cryptocurrency markets? Do they provide trading services to others? Are they trading simply for fun (and therefore as a hobby rather than a business)?).
All of these factors need to be assessed, and a conclusion drawn. The CRA’s conclusion may differ from that of the individual, meaning a potential fight down the road in relation to the correct tax treatment.
For cryptocurrency traders, gains will likely be treated as business income, meaning that the full amount should be subject to income tax. On the other hand, any losses should be business losses available for offset against other income in the year, in the previous three years, or in the following 20 years.
Mining
Cryptocurrency mining is an activity involving the use of computer equipment to solve complex mathematical questions. The output of such mining helps to establish the cryptocurrency itself. Miners are usually rewarded for their efforts with a portion of the cryptocurrency they have mined.
Again, an assessment of the facts must be undertaken. Mining generally points to a business activity, but it may also only be a hobby (and therefore not taxable) in certain circumstances. There may also come a point in time when a legitimate hobby becomes a business, depending on the trading factors mentioned above.
A large portion of the time however, profits from mining will be treated as a business activity, with the business profit and loss implications mentioned above.
Paying with cryptocurrency
Individuals will often purchase cryptocurrency in order to facilitate the purchase of an asset (for example, goods and services offered online). Cryptocurrency is not strictly a ‘currency’ in the sense that it is not equivalent to cash. Instead, it is seen as an asset which can be exchanged for goods and services (known as a ‘barter’ transaction).
Even if cryptocurrency is not purchased to hold as an investment, any gains arising during the holding period, however short, will likely still be subject to tax if the crypto is used as part of a barter transaction. In the absence of business indicators, the capital treatment in respect of investments should apply.
Be careful if you are a GST registrant. If the required business indicators [are] present, a barter transaction involving crypto may also be subject to GST based on the value of the cryptocurrency at the time of the transaction.
Reporting obligations
In some cases, cryptocurrency exchanges (where crypto is purchased) are proving to be as volatile as the currency itself! Therefore, the CRA recommends that records are kept on a regular basis, as there may come a point where the exchange is unable to provide historical trading information.
In order to accurately report cryptocurrency dealings, and to provide sufficient information to the CRA if they come calling, the CRA recommends that information such as transaction dates and amounts, addresses, transaction IDs, wallet records and any other transaction information available be kept by the individual.
