Cryptocurrency and How it is Taxed with the CRA
What is cryptocurrency?
It is a digital form of currency that is not legal tender. Cryptocurrencies are not controlled by a central bank, authority or government.
How is cryptocurrency treated for tax purposes?
The CRA treats cryptocurrency as a commodity, and any income from transactions is treated as business income or capital gains. The income needs to be categorized as either income or capital gains in order to report for income taxes. There are several ways to determine if the income made is business income:
· You carry on activity for commercial reasons
· You undertake activities in a businesslike manner
· You promote a product or service
· You show that you intend to make a profit
When figuring out the value of a cryptocurrency transaction, taxpayers need to keep records for how the value was figured. The CRA generally requires that the fair market value is the highest price both seller and buyer are willing to agree on. If more than one type of cryptocurrency is held, each type is considered to be a separate digital asset and needs to be valued separately.
If a cryptocurrency is considered to be capital property, the adjusted cost base needs to be recorded to accurately report the capital gains. However, if the cryptocurrency is considered to be inventory, you can use the following methods to value the inventory from year to year:
· Value each item at its cost when it was acquired or its fair market value
· Value the entire inventory at fair market value at the end of the year
How do you earn cryptocurrency?
There are two main ways to acquire cryptocurrencies:
· Purchasing through an exchange
· Earning through mining
Mining involves using special computers to solve mathematical problems confirming cryptocurrency transactions. Miners include transactions into blocks and then try to guess a number to create a valid block. These valid blocks are then accepted by the corresponding cryptocurrency’s network, becoming part of the public ledger, which is known as a blockchain.
Once miners create these valid blocks, they receive two payments—one payment is for the creation of a new cryptocurrency and the other is for the fees from the transaction included in a newly validated block.
When taxable property is exchanged for cryptocurrency, the GST/HST that applies is calculated on the FMV of the cryptocurrency at the time of transaction.
The above information is of a general nature only and should not be relied upon for specific situations. We do not endorse the accuracy of the charts on the websites above. Click here for additional tax accounting services information.
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