Cryptocurrency FAQs - What You Need To Know About Tax Season
Cryptocurrency is a relatively new innovation that requires guidelines on taxation so that Canadians are aware of how to meet their tax obligations. Here are 8 frequently asked questions we often receive about cryptocurrency and taxes.
1. Does Cryptocurrency need to be reported on my tax return?
a. Yes, cryptocurrency is taxable upon disposition. You need to track the value of your cryptocurrency in CAD when it is received and report that income on your return as you would any other business or investment transaction.
b. If you hold more than one type of cryptocurrency in a digital wallet, each type of cryptocurrency is considered to be a separate digital asset and must be valued separately. For example, a Bitcoin is valued separately from a Litecoin.
2. What is a disposition?
a. Disposition is when you get rid of something by giving, selling, or transferring it. Gains are subject to tax when you do any of the following.
i. Converting cryptocurrency to CAD
ii. Trading cryptocurrency for cryptocurrency
iii. Using cryptocurrency to buy goods or services
iv. Making a sale or gift of cryptocurrency
3. Is it considered business income or capital gains?
a. Business income
i. The CRA describes signs of business activity as when you carry on the activity for commercial reasons, with business-level planning, and execution, with an intention to show a profit.
ii. Please note, even a single transaction could be considered an adventure in trade, and therefore business income, especially if the intention is to make a quick profit.
iii. Essentially, are you day trading? If so, it’s likely considered business income vs. a capital gain
b. Capital gain
i. If the sale of a Cryptocurrency does not involve any of the business process, then it is considered a capital gain. Only half of the capital gain is subject to tax. Any capital losses can be used to offset the capital gains.
4. Trading Cryptocurrency for another type of Cryptocurrency?
a. Trade or exchange of cryptocurrency including selling of one cyptocurrency for another cryptocurrency is also considered as disposition and you have to report it on your tax return.
5. Cryptocurrency mining tax in Canada?
a. If you are mining cryptocurrency, the gains associated with these activities must be reported as income. CRA says mining can be personal activity if that is a hobby or a business activity if you carry mining for commercial reasons (if you do mining intending to sell it for profit)
b. If you are mining it as a business, you may be able to deduct business expenses such as the cost of the computers and the electricity used.
c. Please keep receipts as support for the purchase of mining hardware and other expenses associated with mining.
6. Do I need to charge GST/HST on cryptocurrency transaction income? (i.e my clients pay me in Bitcoin for regular business services)
a. Per CRA, if you are a business owner and you normally charge GST/HST on your products or services, you’ll need to charge it on cryptocurrency transactions, too. GST/HST is based on the fair market value at the time of the exchange.
b. Example - you pay Your Bottom Line for Tax Services in Bitcoin (assuming YBL accepts Bitcoin), YBL would have to charge you HST on this sale
7. What do I do if my Cryptocurrency was received as a gift?
a. The treatment of gifted cryptocurrency is not clear in the cryptocurrency taxation guidelines from the CRA. You would use $0 or fair market value as cost to report capital gains or losses as it varies case to case. Contact us to discuss your tax situation and find out how we can help.
8. To report the transactions correctly on your return, please make sure you keep track of the following items:
a. The date you buy, exchange, or sell the item cryptocurrency
b. Copy of receipts and all electronic records for purchasing, selling, or exchanging cryptocurrency
c. The value of the cryptocurrency in Canadian dollars at the time of your transaction
d. Cost of the website or software you use to trade
e. A description of the transaction and the person or organization you traded with (even if it’s just their cryptocurrency address)
f. Accounting or legal fees you paid
g. Keep all records that show how you calculated the fair market value.
Check out the Guide for cryptocurrency users from CRA here.
We understand this is very much a moving target with CRA and not entirely black and white. Should you have any questions on the items mentioned above, please let us know and we’d be happy to discuss them with you!
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