What You Need To Know
Cryptocurrency is the Wild West of investing. Not only are these digital currencies completely intangible, but their volatility makes trading and investing in them feel more like playing a computer game than investing in a real asset class. Cryptocurrency is a relatively new innovation that necessitates tax guidelines so that Canadians understand how to meet their tax obligations. In 2014, the Senate examined the issue of cryptocurrency taxation and recommended action to help Canadians understand how to comply with their taxes.
Cryptocurrency taxation for income tax purposes
Cryptocurrency is a non-legal tender digital representation of value. It is a digital asset, also known as a crypto asset or altcoin, that serves as a medium of exchange for goods and services between parties who have agreed to use it. To control how cryptocurrency units are created and to verify transactions, strong encryption techniques are used. In general, cryptocurrencies operate independently of a central bank, central authority, or government.
For the purposes of the Income Tax Act, the CRA generally treats cryptocurrency as a commodity. Any income from cryptocurrency transactions is generally treated as either business income or capital gain, depending on the circumstances. Similarly, if earnings qualify as business income or capital gain, losses are treated as business losses or capital losses.
Taxpayers must determine whether a cryptocurrency activity generates income or capital because this affects how the revenue is treated for income tax purposes. Not all taxpayers who buy and sell cryptocurrency are engaged in commercial activity.
When you pay for goods or services with cryptocurrency, the CRA considers it a barter transaction for income tax purposes. A barter transaction occurs when two parties exchange goods or services without the use of legal currency.
A reasonable method must be used to determine the value of a cryptocurrency transaction where a direct value cannot be determined. Keep records to demonstrate how you arrived at the value. In general, the CRA believes that the fair market value is the highest price, expressed in dollars, that a willing buyer and willing seller, both knowledgeable, informed, and prudent, and acting independently of each other, would agree to in an open and unrestricted market.
Reporting business income or capital gains from cryptocurrency disposal
What exactly is a disposition? This refers to the method of disposing of something, such as giving, selling, or transferring it. In general, owning or holding a cryptocurrency is tax-free. However, there may be tax implications if you do any of the following:
1. Sell or give cryptocurrency as a gift.
2. Trade or exchange cryptocurrency, including the sale of one cryptocurrency in exchange for another.
3. Convert cryptocurrency to fiat currency, such as Canadian dollars.
4. Buy goods or services with cryptocurrency.
Is it a business profit or a capital gain?
The following are common indications that you may be running a business:
2. You conduct business for commercial reasons and in a commercially viable manner.
3. You conduct business-like activities, such as developing a business plan and acquiring capital assets or inventory.
4. You advocate for a product or service.
5. You demonstrate that you intend to make a profit, even if it is unlikely in the short term.
Capital gains from cryptocurrency sales are generally included in income for the year, but only half of the capital gain is taxed. This is known as taxable capital gain. Any capital losses incurred as a result of the sale can only be offset against capital gains; they cannot be used to offset income from other sources, such as employment. If you have no capital gains to offset your capital losses for the year or any of the previous three years, you can carry them forward.
Trading one type of cryptocurrency for another
In general, when you exchange one type of cryptocurrency for another, the barter transaction rules apply. You must convert the cryptocurrency value you received into Canadian dollars. This is a disposition transaction, and you must report it on your income tax return. The resulting gain or loss should be reported as either business income (or loss) or capital gain (or loss).
Mining for cryptocurrencies to earn money
Cryptocurrencies are typically obtained in two ways: through a cryptocurrency exchange or through mining.
Mining is the process of using specialised computers to solve complex mathematical problems in order to confirm cryptocurrency transactions. Miners will incorporate cryptocurrency transactions into blocks and attempt to guess a number that will result in a valid block. A valid block is accepted by the network of the corresponding cryptocurrency and is added to a public ledger known as a blockchain. When a miner successfully creates a valid block, they will be paid twice in a single transaction. One payment represents the creation of new cryptocurrency on the network, while the other payment represents transaction fees from the newly validated block. Those who carry out mining processes are compensated in the cryptocurrency that they validate.
Keeping records and books
You must keep records of your cryptocurrency transactions if you acquire (via mining or otherwise) or dispose of cryptocurrency. This is also true for companies that accept cryptocurrency as payment for goods and services.
tax.crypto.com is a payment and cryptocurrency platform that offers an entire ecosystem of products and services. It is constantly expanding its range of services, and one of the most recent, introduced in the spring of 2021, is their tax tool. This is a relatively new feature on crypto.com, but it has already proven to be quite useful.
The primary goal of the Crypto.com tax tool is to simplify the process of filing cryptocurrency tax returns.
What is the impact of the GST/HST on cryptocurrency?
When a taxable property or service is exchanged for cryptocurrency, the GST/HST applicable to the property or service is calculated based on the cryptocurrency's fair market value at the time of the exchange.
If your company accepts cryptocurrency as payment for taxable goods or services, the cryptocurrency's value for GST/HST purposes is determined by its fair market value at the time of the transaction.
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