With digital currency investments becoming more prominent among Canadians, it is important to understand the tax implications for buying and selling cryptocurrency.
Similar to other investment assets, the Canada Revenue Agency taxes gains on cryptocurrency. Cryptocurrencies should not be confused with legal tender like the Canadian dollar.
The CRA treats cryptocurrency as a commodity. Hence when you use crypto to pay for goods or services, it is treated as a barter exchange.
Valuing Your Cryptocurrency Asset
When valuing a cryptocurrency asset, the CRA requires you to use a reasonable and consistent method and keep records of your valuation.
For example, the value of your crypto asset can be the highest value an independent arms-length buyer is willing to pay for the asset through an exchange broker.
It is important to note that when valuing your cryptocurrency, you must value different types of assets separately.
Buying and holding cryptocurrency does not lead to taxation. When you dispose of cryptocurrency through a sale, gift, or exchange, it will result in tax implications.
If you own cryptocurrency, the rule of thumb is that the following transactions can lead to taxes:
- Selling or exchanging a crypto asset
- Giving someone a cryptocurrency gift
- Using cryptocurrency to purchase goods or services
- Converting your cryptocurrency to Canadian dollars
The tax impact on any gains you make from cryptocurrency depends on if the cryptocurrency transaction results in a capital gain or business income.
If you are not sure whether your cryptocurrency transactions fall under business income tax, the CRA will assess your transactions to determine if they are business-like or for investment purposes.
Cryptocurrency Business Income
Generally, you may be considered to run a cryptocurrency business if you carry out regular commercial activities, promote your crypto activities, or show that you intend to make profits from cryptocurrency. Common examples of a cryptocurrency business are crypto mining and crypto trading.
Frequent buying, selling, and exchanging of cryptocurrency assets can be deemed a business rather than a crypto investment. In this case, the Canada Revenue Agency will tax your cryptocurrency income as business income.
Your business income tax will depend on your business type. As an individual taxpayer with no incorporated business or partnership, your total business income will get taxed at your personal marginal tax rate.
Cryptocurrency Capital Gains
If, on the other hand, your cryptocurrency transactions are not classified as business activities, any profits you make will be taxed as investment capital gains.
The CRA will tax only half (50 percent) of your capital gains at your marginal tax rate. If you make capital losses on your cryptocurrency investments, you can only use the losses to offset capital gains. You cannot use capital losses to reduce other personal income.
Some Canadians mine cryptocurrency as a hobby. In this case, the tax implication for mining cryptocurrency for pleasure and entertainment differs from mining cryptocurrency for business purposes.
Valuing Cryptocurrency for Income Tax Purposes
To report your cryptocurrency business income or capital gains, you must accurately value your cryptocurrency. Your cryptocurrencies may be classified as inventory if you are carrying out crypto business activities.
For tax purposes, you can use two methods when valuing cryptocurrency inventory at the end of the year. Either value each cryptocurrency at the lower of its cost or fair market value, or value your entire inventory at fair market value.
If your cryptocurrency asset is a capital property, you will need to calculate the adjusted cost base, which is the cost of buying the cryptocurrency plus any expenses required to purchase the asset.
When reporting your income tax, you will determine your capital gains by calculating the difference between the adjusted cost base and how much you sold your cryptocurrency (or the fair market value in the event of a deemed disposition).
Final Notes on Cryptocurrency Tax
Always remember to keep your cryptocurrency supporting documents for at least six years. Your supporting documents should show details of your transactions, such as the relevant dates, purchase or transfer receipts, mining pool records, transaction Canadian dollar value, exchange and digital wallet records.
Goods and services tax (GST) or Harmonized sales tax (HST) applies when you use cryptocurrency to purchase applicable goods or services in Canada. The cryptocurrency’s fair market value will determine how much GST/HST to apply.
Need help with determining if you owe cryptocurrency tax? The tax experts at DW & Associates, Chartered Professional Accountants will assess your transactions and calculate any business income or capital gains tax where applicable. Contact us for cryptocurrency tax-related concerns.