Taxation of Cryptocurrency
Cryptocurrency is well known for its volatility. Assets such as Bitcoin can generate significant gains over a relatively short period, but they can also result in significant losses.
As cryptocurrency becomes more widely held and used, it’s important to understand how these assets are treated for Canadian tax purposes.
The Canada Revenue Agency (CRA) generally treats cryptocurrency as a commodity. The tax treatment depends on why the cryptocurrency was acquired, how it is used, and the circumstances surrounding the transactions.
Investment
An investor may purchase cryptocurrency with the intention of holding it in hopes that its value will increase. If the activity does not amount to carrying on a business, the cryptocurrency may generally be treated as a capital asset.
A disposition of the cryptocurrency may therefore result in a capital gain or loss. A taxable event can occur when cryptocurrency is sold or otherwise disposed of, including when it is exchanged for another asset.
Capital losses may generally be used against capital gains, subject to the applicable tax rules.
Trading
Whether cryptocurrency activity is considered investing or carrying on a business depends on the specific circumstances.
Factors can include the frequency of transactions, how long assets are held, the amount of time spent studying cryptocurrency markets, and whether the activity is conducted in a commercial manner.
If the activity is considered a business, profits may be treated as business income rather than capital gains. Similarly, losses may be treated as business losses, subject to the applicable tax rules.
The distinction matters. Investors and active traders should keep clear records and consider how the nature of their activity could affect their tax treatment.
Mining
Cryptocurrency mining involves using computing resources to support blockchain transactions and, depending on the system, receiving cryptocurrency as a reward.
The tax treatment depends on the circumstances. Mining may constitute a business activity, although an activity conducted as a hobby can be treated differently.
Someone who begins mining as a hobby may eventually be considered to be carrying on a business as the scale and commercial nature of the activity increase.
Paying with cryptocurrency
Using cryptocurrency to purchase goods or services can also have tax consequences.
For Canadian tax purposes, cryptocurrency is generally treated as a commodity rather than conventional currency. Using cryptocurrency to acquire goods or services can therefore be considered a barter transaction.
This means disposing of cryptocurrency to make a purchase may result in a gain or loss based on its value and tax cost, even if the cryptocurrency was held only briefly.
Businesses should also consider whether GST/HST applies to a transaction involving cryptocurrency.
Reporting obligations
Good recordkeeping is particularly important with cryptocurrency. Exchanges and platforms can change or cease operating, which may make historical information difficult to retrieve later.
Keep records that support your cryptocurrency transactions, including dates, amounts, wallet information, transaction IDs, and other available transaction details.
Complete records can make tax reporting easier and help support the treatment of your transactions if the CRA asks for additional information.
This article is provided for general information only and should not be considered accounting, legal, or tax advice. Your individual circumstances may differ. Contact your trusted advisor for guidance specific to your tax needs.
