The Purpose of this Guide
The purpose of this Canadian cryptocurrency taxation guide is to help you identify if you have triggered a taxable event to report on your Canadian tax return from cryptocurrency activities. The cryptocurrency environment is constantly evolving; therefore, this is a guide of the basics. As of January 1, 2022; the CRA has released limited guidance for the tax treatment of cryptocurrency. The information below may be subject to change based on new developments from the CRA after January 1, 2022.
Please note this is not tax advice, please do your own due diligence. We recommend consulting the advice of an expert when evaluating your specific tax situation.
How the CRA Views Cryptocurrency
According to the CRA:
“Cryptocurrency is a digital representation of value that is NOT legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it.“
The CRA also states that they view cryptocurrency as a commodity for tax purposes, so any income is either treated as capital gains or business income depending on the circumstances; we will discuss this further in this guide.
Since the CRA does not currently view cryptocurrency as legal tender, when you pay for a good or service with cryptocurrency it is treated as a barter transaction, which is the exchange of one good or service for another. Generally, this means the value in Canadian dollars of the good or service you received may be used to determine the value of the cryptocurrency you spent. This value in Canadian dollars will be used to calculate if you are subject to additional taxable income on the cryptocurrency you spent if you had originally purchased it for a higher or lower amount. In some instances the value of the cryptocurrency exchanged is more readily available and will be used to determine the transaction price.
The vendor receiving the cryptocurrency as payment would report taxable income based on the value in Canadian dollars determined by the barter transaction, the cost base of the cryptocurrency received will also be equal to this amount.
Taxable Transactions
Taxable events will require reporting on your tax return; therefore, it is important to understand the timing of taxable events and how they are triggered. Generally, a taxable event is triggered when your disposition amount is higher or lower than your cost base. In the most simplified terms, the amount you paid for your cryptocurrency will usually be its cost base.
Each type of cryptocurrency holds its own specific cost base, it is not lumped together with other types of cryptocurrencies. For example, the total cost base of your Bitcoin is tracked separately from the total cost base of your Ethereum.
The following transactions are taxable events which will trigger dispositions of cryptocurrency:
● Selling or gifting a cryptocurrency;
● Exchanging cryptocurrency for another type of cryptocurrency or stable coin;
● Exchanging cryptocurrency for fiat currency (eg. CAD);
● Using cryptocurrency to purchase goods or services;
● Exchanging cryptocurrency for an Initial coin offering;
● Yield farming and other DeFi activities;
● Losing cryptocurrency to a bankrupt exchange; e.g. Quadriga - additional elections required.
For example:
- You purchase Bitcoin for $100 Canadian dollars;
- The value of the Bitcoin you purchased rises to $150 Canadian dollars;
- You exchange all of this Bitcoin worth $150 Canadian dollars for Ethereum;
- You have triggered a disposition on the exchange of the Bitcoin to Ethereum and created income of $50 that will need to be reported for tax purposes. This income is calculated as the disposition amount of $150 minus your cost base of $100;
- The cost base of the Ethereum purchased is $150 Canadian dollars, this increase in the cost base ensures you are not double taxed on future dispositions.
If you have completed any type of transaction above, it is very likely you have triggered a taxable event that must be reported on your tax return. This is further supported when we consider how volatile cryptocurrency can be and how fast values change after purchase. Depending on your situation the taxable event will be treated as a capital gain/loss or business income/loss.
Many individuals believe that tax can only be triggered when cryptocurrency is converted back to fiat, this view is incorrect and will result in being offside with the CRA. Sending cryptocurrency to your own wallet or an exchange you use is not a taxable event as a disposition did not occur. Tax consequences will occur for transactions where your cost base of the cryptocurrency is greater than or less than the disposition value.
Business Income vs. Capital Gains
The income you receive from disposing of cryptocurrency may be considered business income or a capital gain. The tax treatment differs depending on how the income is classified. Whether the income should be classified as business income or capital gains is a determination based on the facts of your specific situation.
If you are considered to be in the business of trading cryptocurrency, the cryptocurrency will be held as inventory and 100% of the income is taxable. You may also deduct the associated expenses incurred to earn that income.
With capital gains treatment, only 50% of the income earned is taxable. The capital gain is calculated as your net proceeds of disposition minus the adjusted cost base.
There are multiple factors the CRA looks at to determine whether your income is a result of a business or capital. This is not a one size fits all approach, an analysis should be conducted by a CPA for each individual's situation. However, the CRA indicates that some of the key areas to consider when determining whether your crypto activities will be considered a business activity are:
● You carry on activity for commercial reasons and in a commercially viable way;
● You undertake activities in a business like manner, which might include preparing a business plan and acquiring capital assets or inventory;
● You promote a product or service;
● You show that you intend to make a profit, even if you are unlikely to do so in the short term.
The CRA also notes that taxpayers may review the CRA’s general guidelines for security transactions when evaluating whether income from cryptocurrencies should be classified as business income or capital gains. The CRA cautions that cryptocurrencies are not Canadian securities under the income tax act, however, the guidelines may still be helpful to determine if an individual is a trader in cryptocurrencies that earns business income. Please see the 8 factors in paragraph 11 of CRA page "IT479R ARCHIVED - Transactions in securities".
Generally, if you are buying cryptocurrency with the intention to invest and you trade infrequently, there may be a strong case to classify any income earned as capital gains for tax purposes. However, if you are actively trading cryptocurrency the CRA may deem you to be carrying on a business and income earned will be taxed accordingly. This can be a complex analysis with many variables to keep in mind.
Cryptocurrency Mining
According to the CRA, cryptocurrency mining is explained as follows:
“Mining involves using specialized computers to solve complicated mathematical problems which confirm cryptocurrency transactions. Miners will include cryptocurrency transactions into blocks, and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrency’s network and becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two payments in a single payment amount. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Those who perform the mining processes are paid in the cryptocurrency that they are validating.”
The tax treatment of cryptocurrency mining differs depending on the circumstances. The CRA will either view mining activities as a business or as a hobby, the appropriate tax treatment depends on this classification.
Business Classification
If you are mining cryptocurrency with the intention to make a profit, the activities may be considered a cryptocurrency mining business. Therefore, the cryptocurrency you receive from mining will be taxed as business income. However, you will be entitled to a corresponding deduction for the expenses associated with your cryptocurrency mining activities. Examples of expenses may include computer hardware, rent, electricity, internet, etc. CRA has provided limited guidance in regard to the timing of recognizing revenue from cryptocurrency mining, however, CRA stated in technical interpretation 2018-0776661I7 dated August 8, 2019:
“In our view, Bitcoin received by a miner to validate transactions is consideration for services rendered by the miner. Where a taxpayer is in the business of Bitcoin mining, the Bitcoin received must be included in the taxpayer’s income at the time it is earned under section 3 and section 9 of the Income Tax Act.”
The timing of when to recognize revenue and expenses can be complicated, we recommend discussing your mining activities with a CPA firm to ensure the mining income is reported correctly. You may also benefit from incorporating your cryptocurrency mining business to access lower corporate tax rates and defer personal tax.
Hobby Classification
Generally, the CRA views a hobby as something that is undertaken for pleasure, entertainment, or enjoyment, rather than for business reasons. However, if the hobby is pursued in a business like manner, it may be viewed as business income. If your mining activities are a hobby, the mining income received will be taxed as a capital gain once you dispose of the coins received from mining. The cost base of the cryptocurrency received will be determined by your cost of mining the coins.
Determining whether your cryptocurrency activities should be classified as a business or a hobby can be complex. It is important to analyze multiple factors to ensure you are treating the income correctly for tax purposes. The tax treatment between the two classifications is materially different.
Staking, DeFi, & NFT’s
The CRA has not issued specific guidance in respect to staking, DeFi activities, or NFT’s, each situation can differ and requires a specific approach. This area of tax is beyond the scope of this guide.
Airdrops & Hardforks
If your cryptocurrency activities are classified as investment income and not as business income, then there are no immediate tax reporting consequences when you receive new cryptocurrency from an airdrop or hardfork. The cost base of this new cryptocurrency received will be $0; when you dispose of this cryptocurrency you will have a capital gain to report.
If your cryptocurrency activities are classified as business income, it would be best to connect with a CPA to analyze the situation and determine the tax obligations.
Superficial Loss Rule
Further complexities arise that deny a capital loss when you sell and repurchase the same cryptocurrency within a short period of time.
A superficial loss can occur when you dispose of capital property for a loss and both of the following conditions are met:
● You, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called "substituted property") during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale.
● You, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.
A simplified example of when a superficial loss would occur is when you dispose of cryptocurrency at a loss and you, or your spouse repurchase the same type of cryptocurrency at any time during the period starting 30 calendar days before the date of sale and ending 30 calendar days after the date of sale.
If you incur a superficial loss, you cannot deduct the loss when you calculate your income for the year. However, you can usually add the amount of the superficial loss to the adjusted cost base of the cryptocurrency that was repurchased. This will either decrease your capital gain or increase your capital loss when you sell the cryptocurrency in the future. This rule prevents aggressive tax planning that involves selling and repurchasing cryptocurrency for the purpose of crystallizing accrued losses on cryptocurrency a taxpayer still wishes to own.
T1135 Reporting & Penalties
Filing form T1135 Foreign Income Verification Statement may be required if the cost base of your cryptocurrency in Canadian dollars exceeds $100,000 at any point in the year. The requirement to file this form will depend on multiple factors such as how the cryptocurrency is stored (e.g., on an exchange or hot wallet storing data outside of Canada vs. cold storage in Canada). Moreover, if your cryptocurrency activities are classified as business income, you may be exempt from the requirement to file this form. The rules regarding T1135 reporting for cryptocurrency are complex, we recommend discussing your situation with a CPA.
It is important to correctly report all of your cryptocurrency holdings before you incur interest and penalties from the CRA. For example, failing to file form T1135 for a taxation year can quickly result in a $2,500 penalty. If you were required to file this form and failed to do so for the 2019 and 2020 taxation years, you may incur a $5,000 penalty from the CRA. If you have failed to file form T1135 in the past, you may still have options to avoid prosecution, penalties and some of the interest owing through the CRA Voluntary Disclosure Program.
Record Keeping - CRA’s Suggested Practices
When it comes to record keeping, it is important to be thorough. It is always possible an exchange may lose your data, leaving you with limited information to provide to CRA in the event of a cryptocurrency audit. The CRA recommends the following in regard to record keeping for cryptocurrency:
Keeping Books & Records
If you acquire (by mining or otherwise) or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services.
Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, we suggest that you export information from these exchanges periodically to avoid losing the information necessary to report your transactions. You are responsible for keeping all required records and supporting documents for at least six years from the end of the last tax year they relate to.
You should maintain the following records on your cryptocurrency transactions:
● the date of the transactions
● the receipts of purchase or transfer of cryptocurrency
● 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 (even if it is just their cryptocurrency address)
● the exchange records
● accounting and legal costs
● the software costs related to managing your tax affairs.
If you are a miner, also keep the following records:
● receipts for the purchase of cryptocurrency mining hardware
● receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time)
● the mining pool details and records
With cryptocurrency and its decentralized nature, you must be in control of tracking and reporting all of your transactions. There are various online tools available to track and categorize your cryptocurrency activities which can simplify the bookkeeping process. This is not a comprehensive guide; we hope this was able to provide insight on some of the tax reporting areas for cryptocurrency.
Reference: Everything in italics is in the CRA's words and directly from the CRA website or Technical Interpretation from CRA: CRA page "Guide for cryptocurrency users and tax professionals", CRA page "What is a superficial loss?", CRA Technical Interpretation "2018-0776661I7".
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