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?
When you use cryptocurrency to pay for goods or services, CRA considers it to be a barter transaction. The value of cryptocurrency paid is equal to the value of goods or services received at the time. If the value cannot be determined from the goods or services received, then you could convert using the fair market value of the cryptocurrency at the time.
Each cryptocurrency is considered to be a separate digital asset and must be valued separately. For example, Bitcoin must be valued separately from Ethereum.
You are considered to have disposed of cryptocurrency when you sell or give away as a gift, trade or exchange with another type of cryptocurrency, convert to conventional currency such as Canadian or US dollars, or use it to purchase goods or services.
If you regularly and frequently buy and sell cryptocurrency, similar to day trading, the profits could be considered business income and fully taxed. Otherwise, the profits will be considered capital gain and only half the gain will be taxed.
Some common signs that you may be carrying on a business are:
• You carry on the 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 you trade one cryptocurrency, say “A”, for another, say “B”, the proceeds of disposition of “A” will be the value of “B” at the time. The adjusted cost base will be the original cost of “A” when it was acquired. You will either have a capital gain or loss, or business income or loss, depending on whether you are holding “A” as an investment or carrying on a business.
If you acquired cryptocurrency through mining, you are most likely doing it for business to make profit. In this case, the cryptocurrency is your business inventory. Any disposal of inventory will result in business income and taxed as such.
Taxpayers have to keep records of all cryptocurrency transactions, whether business or capital. If you use cryptocurrency exchanges to obtain rates to calculate values of transactions, CRA recommends that you download the information as support for your calculations. This is because online information could become lost or inaccessible at any time.
The above information is of a general nature only and should not be relied upon for specific situations. Call Marlies Y Hendricks, CPA at 416-766-3941 or submit email enquiry form below to set up a consultation.
