Is Bitcoin Taxable in Canada? CRA’s Treatment of Cryptocurrency in 2022

Since cryptocurrencies are a relatively new invention, there need to be taxation regulations in place so that Canadians may understand how to fulfill their tax duties. In 2014, the Senate conducted a study of the topic of cryptocurrency taxation and made recommendations for action to assist Canadians in understanding how to file their taxes, which the Canada Revenue Agency (CRA) is carrying out by disseminating this guidance.

What is Cryptocurrency? 

A digital currency, or cryptocurrency, is an alternative payment method developed utilizing encryption methods. By utilizing encryption technology, cryptocurrencies may act as both a medium of exchange and a virtual accounting system. You need a cryptocurrency wallet in order to utilize cryptocurrencies. These wallets might be software that is downloaded to your PC, mobile device, or the cloud. Your encryption keys, which verify your identity and connect to your bitcoin, are kept in the wallets.

Keep in mind that various cryptocurrencies are treated as separate properties. For instance, if you received income from both Bitcoin and Litecoin, they must be valued and reported individually. When you “dispose” of anything by selling, gifting, or transferring it, you are subject to taxation. This implies that you are exempt from paying taxes on gains gained from owning cryptocurrency. Taxes must be paid, nevertheless, if you use bitcoin to sell, swap, convert, or acquire anything. If you received any revenue this year from the sale of cryptocurrency, you must include that income on your current-year tax return.

Cryptocurrency taxation for income tax purposes

Cryptocurrency is a virtual digital currency that is not accepted as payment. It is a digital asset that may be used as a means of exchange for goods and services between the parties that agree to use it. It is also frequently referred to as a crypto asset or an altcoin. Strong encryption methods are employed to authenticate transactions and regulate the creation of cryptocurrency units. In general, cryptocurrencies run without the help of a government, central bank, or other central entity.

How does the Canada Revenue Agency handle cryptocurrency? 

For the purposes of the Income Tax Act, the CRA often classifies cryptocurrencies as commodities. Depending on the situation, any revenue from bitcoin trades is often considered either company income or capital gain. Losses are also considered business losses or capital losses if profits qualify as capital gains or business income, respectively.

Because it impacts how the money is taxed for income tax purposes, taxpayers must determine if bitcoin activity generates income or capital. Taxpayers who purchase and sell cryptocurrencies may not all be conducting business. For income tax purposes, the CRA classifies bitcoin payments for goods and services as barter transactions.

How are bitcoin tax deductions and reporting calculated?

As with trading stocks or gold, any earnings you’ve made from trading Bitcoin, Ethereum, or another cryptocurrency are regarded as capital gains. Tax considerations apply to half of these profits.

However, if you obtained any bitcoin by mining, the situation is altogether different. The amount you earn from cryptocurrency mining is always subject to taxation by the CRA, and you must record it on your return using a T2125 form. This is due to the fact that the CRA does not view cryptocurrency mining as requiring any initial investment; rather, you are working to earn something valuable, which is effectively commercial revenue.

What would happen if you failed to disclose your cryptocurrency during tax season?

Cryptocurrency profits are treated by the Canada Revenue Agency (CRA) in the same manner as earnings in Canadian dollars and are subject to the same tax requirements. Keep in mind that you should always keep a record of your transactions and financial activities, even those involving cryptocurrency. By doing this, you can keep track of your capital gains and losses; otherwise, the CRA can overtax you or reject your losses as legitimate. It would seem that since most bitcoin transactions are anonymous, the authorities won’t find out if someone doesn’t disclose their revenue. However, the CRA is highly capable of tracking your income and determining whether you’re not declaring all of it through audits and other methods.

Key points 

Cryptocurrency is virtual, digital money that is not accepted as payment. Cryptocurrencies may function as both a means of commerce and a virtual accounting system by leveraging encryption technology. When you “dispose” of anything by selling, gifting, or transferring it, you are subject to taxes. Cryptocurrency gains are taxed in the same way as earnings in Canadian dollars by the Canada Revenue Agency (CRA). Keep in mind that you should always keep a record of your transactions and financial activity, including those involving cryptocurrencies.