What is cryptocurrency?
Cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets. Bitcoin was the first decentralized digital currency, released in 2009. It was released by a pseudonymous developer (or group of developers) under the name of Satoshi Nakamoto. Cryptocurrencies are classified into two main categories: decentralized cryptocurrencies and centralized cryptocurrencies. Decentralized cryptocurrencies do not require any central authority to operate; all transactions take place on a public distributed ledger using peer-to-peer technology. Centralized cryptocurrencies are managed by a central authority and rely on trust in that authority.
What is a blockchain? The term “cryptocurrency” is used to describe a digital asset that exists as a currency but is not backed by any government or central bank. A blockchain is an open, decentralized network that allows for the transfer of assets and information from one party to another through the use of encrypted transactions. As the popularity of cryptocurrencies continues to increase, so too does the need to understand them.
Tax treatment of cryptocurrency for income tax purposes in Canada
The Canadian government has not yet issued official guidance on the taxation of cryptocurrencies. However, the federal government has clarified that certain crypto-related activities may be subject to taxation if they constitute a business activity or a trade or business. The Income Tax Act provides that an individual is taxable on their worldwide income and gains from business activities carried out in Canada.
The Income Tax Act defines a “business” as including any trade, profession, business, calling, or employment. A “trade or business” is defined as including any trade, commerce, business, or occupation, whether carried on for profit or not. Cryptocurrency is not currently recognized as a currency by the federal government. This means that cryptocurrency transactions are not taxed, but rather gains and losses from such transactions are taxable as capital gains. Gains or losses from the sale of a cryptocurrency are taxable according to the value of the cryptocurrency at the time of sale. However, gains or losses from the sale of a cryptocurrency in exchange for fiat currency (e.g., Canadian dollars) are taxable only if the transaction was intended to be a trade or business activity.
Reporting business income or capital gains from the disposition of cryptocurrency in Canada
You may be subject to taxation on the profits generated through cryptocurrency sales as either business income or capital gain, depending on your specific circumstances. To properly report your income, you must first and foremost determine what kind of income you have.
The following features are common indicators that you are in the business of your choice:
You are continuing to conduct business operations in a manner that is both financially and operationally feasible.
Business transactions, such as the development of a corporate strategy and the acquisition of capital assets or inventory, are carried out in a professional manner.
You’re making a sales presentation for a product or service that you’re offering to potential customers.
Despite the fact that you don’t feel you’ll be able to generate a profit in the near future, your activities indicate that you want to do so in the near future.
The majority of business jobs necessitate some kind of regularity or include some sort of time-consuming process in some form. In order to provide an accurate assessment, each circumstance must be considered on its own merits and analyzed separately.
If a single transaction has the characteristics of a business, such as when it is an adventure or a concern that is in the nature of a commercial enterprise, it may be deemed a business. Individual cases must be considered when determining whether or not to conduct business in a particular location. Please see our past literature on the issue if you want to learn more about an adventure or a problem in the nature of trade.
Consider the date on which the business was created when deciding whether or not there is a commercial activity present. In some cases, if you are still in the process of setting up your firm or preparing to do so, you may not be regarded to have completed the procedure. A main activity must be undertaken as part of your revenue-generating process in order for you to create income on a consistent basis. According to general business practice, any money or property received prior to starting your business is not considered commercial income. Similar to this, you will not be allowed to claim income tax deductions until after the firm has been established. To learn more about the start of business operations, please see our prior blog post on the subject.
Mining cryptocurrencies, for example, is an example of a cryptocurrency-related business venture.
The use of cryptocurrencies for trading is growing more and more widespread.
ATMs, bitcoin exchangers, and other financial services are all readily available.
It is important to remember that while the information in this interpretation bulletin on income and capital is useful, it is also vital to remember that cryptocurrencies are not considered Canadian securities under the Income Tax Act and, as such, are not subject to income tax.
Trading cryptocurrency for another type of cryptocurrency in Canada
In most circumstances, when you sell one cryptocurrency to receive another, the same laws that govern barter transactions apply to the transaction. This means that you must convert the value of the cryptocurrency you got into Canadian dollars in order to be paid in Canadian dollars. It is deemed a disposition for tax purposes, and you must record it as such on your income tax return as a result of this transaction. Depending on the facts and circumstances, the profit or loss from this operation should be reported as either business income (or loss) or capital gain (or loss) (or loss).
If you are trading on an exchange, there may be additional rules pertaining to the sale of one type of cryptocurrency for another. You should check with your exchange of choice to find out what their policies are pertaining to this type of transaction. Buying cryptocurrency with “fiat” currency (Canadian dollars) There are times when you may want to buy some cryptocurrency with Canadian dollars instead of using Bitcoin or another cryptocurrency. This can be useful for a variety of reasons, such as: You don’t have access to any cryptocurrency yet but would like to get started. You have some Canadian dollars that you want to invest in the cryptocurrency market but are not ready to use them to buy any yet. You want to make sure you will receive the same amount of cryptocurrency you are buying in the form of Canadian dollars. For example, if you are paying with CAD$100.
Earning cryptocurrencies through mining in Canada
Mining is the process of confirming bitcoin transactions by using specialize computers to solve complex mathematical problems. Miners will incorporate cryptocurrency transactions into blocks and attempt to forecast a quantity that will result in a valid block. A valid block is recognized by the relevant cryptocurrency network and uploaded to a public ledger known as a blockchain. When a miner creates a legitimate block, they are rewarded twice in a single transaction. The first payment reflects the creation of fresh bitcoin on the network, while the second payment reflects transaction fees from the newly validated block. Those who engage in mining activities are paid in the cryptocurrency that they validate.
The tax treatment of cryptocurrency miners differs depending on whether their mining activities are personal (a hobby) or commercial. This is decided on an individual basis. A hobby is usually followed for the sake of pleasure, entertainment, or enjoyment rather than for monetary benefit. However, if a hobby is carried out in a sufficiently commercial and businesslike manner, it can be regarded a business activity and taxed accordingly.
In Canada, the tax treatment of cryptocurrencies is still being determined. At this time, cryptocurrencies are not considered property for which capital gains tax applies. This means there is no special tax treatment for cryptocurrencies generated through mining in Canada. However, investors should still be aware of income tax implications when considering investing in cryptocurrencies. Income Tax Implications The Canadian government has announced that they do not intend to impose any special taxation on individuals who choose to invest in cryptocurrencies. However, investors should still be aware of income tax implications when considering investing in cryptocurrencies. When you sell your cryptocurrency for fiat currency (Canadian dollars), you will have to pay income tax on the profit you realize from the sale. If you use the cash from the sale to pay for other business expenses, you may reduce or eliminate the amount of tax you owe. You should consult a qualified professional like a Professional Tax Accountant to help you understand the tax implications of your particular situation. Cryptocurrencies are considered property for which capital gains tax applies. This means there is a potential gain (profit) when you sell your cryptocurrency for fiat currency (Canadian dollars). The profit you realize when you sell your cryptocurrency is the market value of the cryptocurrency you possess less any expenses you incurred in obtaining and holding the cryptocurrency. If you use the cash from the sale to pay for other business expenses, you may reduce or eliminate the amount of tax you owe. You should consult a qualified tax professional like an accountant at Bomcas Canada Accounting and Tax Services to help you understand the tax implications of your particular situation. Mining activities are often carried out by individuals who have formed a business to facilitate mining operations. If your mining activities form part of a business, you will have to file corporate income tax returns and pay taxes on the profits you make from mining. The amount of tax you pay will depend on whether you are a corporation, partnership or a sole proprietorship.
Valuing cryptocurrencies either as capital property or inventory in Canada
In order to file your income tax return, you must first learn how to value your bitcoins. The classification decides whether they are capital property or inventory. When you own cryptocurrencies as a capital asset, you must keep track of the shifting cost base in order to properly report any capital gains.
Use one of the two year-to-year consistent inventory valuation methodologies if bitcoins are considered inventory.
Each item in the inventory is valued at the lower of its acquisition cost or its fair market value at the end of the year. At the end of the year, the entire inventory is appraised at fair market value (generally, the price that you would pay to replace an item or the amount that you would receive if you sold an item)
Depending on the nature of your organization, you may need to employ a variety of inventory valuation techniques. A company’s inventory, such as an expedition or a trade enterprise, must be valued at the cost of acquisition.
To determine which item is less expensive, compare its cost and fair market value. The lowest amount for each item (or category of items if specific products cannot be distinguished) is then used to compute the total value of your inventory at the end of the year.
The term “cost” refers to the initial cost of the individual item of inventory (for example, a block of cryptocurrency), plus all reasonable charges incurred in obtaining that specific block of cryptocurrency, in the phrase “cost at which the taxpayer purchased the property.”
1. Cost is the price you pay for the block of cryptocurrency. It includes the price you paid for any services that you provided to the person who sold you the block of cryptocurrency, such as the time and skill required to mine the block of cryptocurrency. If the seller did not provide you with the block of cryptocurrency, but instead sold it to someone else, the cost is the price you paid to obtain the block of cryptocurrency from that third party. Fair market value is the price at which the block of cryptocurrency would sell for if it was offered for sale by an informed third-party buyer. Example Suppose you purchase a block of cryptocurrency for $1,000 and charge a $10 fee for the service of mining it. The fair market value of this block of cryptocurrency is $1,
2. The total cost of the block of cryptocurrency is $1,
3. The total fair market value of your inventory is $1,
4. If you mine 10 blocks of cryptocurrency during the year and charge $20 per block, the total cost of the 10 blocks of cryptocurrency is $
5. The total fair market value of your inventory is $
6. Cost-of-sales method The cost-of-sales method applies when you acquire goods or services as a capital asset. You must use the cost-of-sales method to value the cost of any services that you provide to another person in connection with the acquisition of the goods. For example, suppose you purchase a block of cryptocurrency for $1,000 and you pay $10 for mining it. You also provide a service of mining other blocks of cryptocurrency. Your cost for the services of mining the first block of cryptocurrency is $
7. This is your cost-of-sales. The fair market value of this block of cryptocurrency is $1,
8. The fair market value of your inventory is $1,
9. Cost-of-sales method for services You may need to use the cost-of-sales method to determine the fair market value of services that you provide to another person in connection with the acquisition of the goods.
Keeping books and records in Canada
When you acquire (through mining or otherwise) or sell of bitcoin, you must keep records of such transactions. This is also true for businesses who accept cryptocurrency as payment for goods and services.
Varying cryptocurrency exchanges have different policies regarding the types of documents they maintain and how long they keep them. If you utilize cryptocurrency exchanges, we recommend regularly exporting information from these exchanges to avoid losing the information needed to report your transactions. All required records and supporting documents must be kept for at least six years from the end of the most recent tax year to which they pertain.
1. For example, if you acquired your bitcoin in 2017 and you are filing a return for 2018, the records you need to keep will be for six years from December 31,
2. All record-keeping requirements are found in Canada Revenue Agency Publication
3. For more information on this publication, visit the CRA website at www.cra-arc.gc.ca/publications/. Note: The information in this section is not intended to be legal advice. It is provided for general information only. Consult with one of our accountant at Bomcas Canada accounting and tax services if you have any questions about the contents of this section. Acquiring (through mining or otherwise) or selling bitcoin You must retain all records related to the acquisition (whether by mining or otherwise) or sale of bitcoin for at least six years from the end of the most recent tax year to which they pertain. This includes all of the following:
1. Copies of all purchase orders or other written agreements;
2. Copies of all invoices or other billing statements;
3. Copies of all receipts, vouchers, or other documents evidencing payment for goods or services received;
4. Copies of all bank or other financial institution statements relating to your account(s) from which you acquired bitcoin;
5. Copies of all statements or notices from any stock or commodity exchanges on which you disposed of bitcoin;
6. Copies of all statements or notices from any government agencies in which you disposed of bitcoin;
7. Copies of all statements or notices from any coin or currency exchanges on which you disposed of bitcoin;
8. Copies of all statements or notices from any broker-dealers with whom you engaged in transactions involving bitcoin;
9. Copies of all statements or notices from any other person (including a relative) to whom you transmitted bitcoin for safe keeping;
10. Copies of all tax returns you filed with respect to your bitcoin activity;
How does the GST/HST apply to cryptocurrency in Canada?
When a taxable property or service is exchanged for cryptocurrency, the GST/HST applicable to the property or service is calculated using the cryptocurrency’s fair market value at the time of exchange.
If your business accepts bitcoin as payment for taxable goods or services, the cryptocurrency’s GST/HST value is determined by its fair market value at the time of the transaction. Keep any records that show how you determined the fair market value.
The fair market value of the cryptocurrency is the price you would pay or receive for it in an arm’s length transaction between a willing buyer and a willing seller. It may be different than the “black market” price. The fair market value of the cryptocurrency is not affected by tax implications, nor does it have any special Canadian legal status. However, if you choose to convert your cryptocurrency into fiat (Canadian) money to pay your GST/HST liability, you must do so at the highest official currency exchange rate.