This is a guide presented by the Canada Revenue Agency (CRA) that covers the Taxation issue on Cryptocurrency. This way, you can comprehend the tax obligations and implement the recommendations mentioned ahead wherever necessary.
Tax treatment
Even though cryptocurrency is not a legal tender, it is a digital asset that can be used as a medium of exchange for goods and services. This operates through strong encryption and without any regulation from a central bank or authority. Cryptocurrency is mostly unclear to everyone so in this you should contact an accountant to tell you about the tax stuff.
The word ‘cryptocurrency’ is referred to Bitcoin and other similar virtual currencies in this article. The income tax implications regarding the transactions involving cryptocurrency are as follows:
Basics
The CRA considers cryptocurrency as a commodity for purposes of the Income Tax Act. Therefore, taxpayers must establish the outcome of the transaction implemented with cryptocurrency. It can be treated as a business income, capital gain, loss, etc. For this purpose, a value must also be ascertained for which a reasonable method should be used. In the case of holding more than one cryptocurrency, they should be considered and valued differently. In case of any difficulty you should contact an accounting firm to help you gain some knowledge.
Reporting business income or capital gains from the disposition of cryptocurrency
A disposition refers to the giving away, transferring, or selling of a commodity. If you are involved in any of the following:
- Selling or gifting cryptocurrency
- trading or exchanging cryptocurrency
- converting cryptocurrency to government-issued currency
- transacting with cryptocurrency
Business income or capital gain?
To determine what kind of income you get from disposing of a cryptocurrency, you must know the conditions for considering it as a business income or capital gain. If it was regarding commercial activity, business operation, promotion of a good or service, or short-term profits, you would consider it as a business income. Every situation must be thoroughly analyzed for appropriate determination.
The other factors for determining this case include the time of business and its origin. In any case, some of the cryptocurrency businesses include cryptocurrency mining, trading, and exchanges.
Reporting
Capital gain earned from cryptocurrency is included in income for the year, but only half of it is taxable. In case of losses, it can be offset against capital gains. The losses can be carried forward.
Trading
Trading one cryptocurrency for another, which can turn either into a gain or loss, is also considered a barter transaction that must be reported on the income tax return.
Earning cryptocurrencies through mining
You can acquire cryptocurrencies either through a purchase or mining. Mining required resolving complicated mathematical problems for confirming cryptocurrency transactions. These transactions are included in blocks. Only valid blocks are accepted, which become a part of a public ledger, aka blockchain. After the creation of a valid block, the miner receives two payments in a single transaction. One payment represents the creation, while the other represents the fees of the new cryptocurrency. The miners are paid in cryptocurrency for successful validation.
The income tax treatment for mining depends upon the nature of the activity. It generally varies from case to case. It can either be a hobby or for business purposes. The latter is taxable.
Valuation of cryptocurrencies
For income tax purposes, you must determine whether your cryptocurrency is considered as capital property or inventory. In the case of the former, the adjusted cost base is recorded and tracked for reporting any gains or losses. Otherwise, any of the following two methods are used for valuation:
- Value individual inventory items at cost or fair market value at the end of the year, whichever is lower.
- Value whole inventory at fair market value at the end of the year.
Other methods could be used depending upon the type of business. However, the same method is applied from year to year.
Keeping books and records
You must keep all the required records and supporting documents for at least six years. You can give these documents to a bookkeeper so they will be in safe hands. The following records are necessary for cryptocurrency transactions:
- the date and receipts of the transactions
- 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
- accounting and legal costs
- the software costs related to managing your tax affairs.
In the case of a miner, keep the following:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation (power costs, mining pool fees, etc.)
- the mining pool details and records
Application of GST/HST to cryptocurrency?
When a taxable property is exchanged for cryptocurrency, the GST/HST is calculated based on the fair market value of the cryptocurrency at the time of the exchange.