We live in a digital age — information is transferred, and transactions are completed at a speed never thought possible. While it sometimes seems that tax authorities play catch-up to technology’s latest advances, not much escapes the scrutiny of the Canada Revenue Agency (CRA). The ever-growing frequency of cryptocurrency transactions — along with the consistent volatility in its value — has left many people who have traded, earned, or transacted using it wondering how to treat it for tax purposes.
The CRA provides general guidance about the taxation of transactions carried out using cryptocurrency. While the CRA acknowledges that cryptocurrencies are a digital asset that can be used to buy and sell goods or services over the Internet, they are not recognised as legal tender in Canada.
The CRA takes the position that where cryptocurrency is used to pay for goods or services from a vendor or service provider carrying on a business, then that vendor or service provider supplied a taxable good or service. However, unlike a similar transaction carried out using traditional currency, a transaction using cryptocurrency is subject to the barter rules for income tax purposes.
When cryptocurrency is used to buy or sell goods or services, it will be necessary to put a Canadian dollar value on the business transaction for tax purposes. Once a value has been established, the vendor or service provider will then be considered to have received that dollar value for the sale of the good or the service rendered. The same principle applies where goods are exchanged for cryptocurrency.
According to the CRA, where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
Cryptocurrency can also be bought, sold, or exchanged. In this regard, the CRA has specifically stated that cryptocurrency is to be treated as a commodity for income tax purposes and any resulting gains or losses arising from the trading of cryptocurrency will be taxable in the same manner as any other commodity.
Whether such gains or losses are taxable as income or capital will depend on the facts surrounding the transactions. Like transactions involving other types of commodities, the tax consequences of realizing any resulting gains or losses would be determined by considering a variety of factors, including the intention of the taxpayer, as well as both the nature of and the frequency of the transactions.
In most cases, the courts and the CRA have relied on a combination of such factors when determining whether a taxpayer’s activities are on account of income. For instance, a taxpayer who actively and regularly speculates in cryptocurrency, such as a day trader, may be more likely to be taxed on income account. By comparison, a taxpayer who buys cryptocurrency infrequently with the intention of holding it as an investment may be more likely to have these transactions taxed as capital in nature.
Finally, the CRA takes the position that the foreign reporting requirements extend to cryptocurrencies that are situated, deposited, or held outside of Canada. This means that Canadian taxpayers who hold cryptocurrency outside of Canada may have an obligation to file Form T1135 to report the property.
There may be some uncertainty as to whether transactions arising from the mining of cryptocurrency are on account of income or capital. Like cryptocurrency trading, the income tax implications of cryptocurrency mining will differ depending on whether these activities would be considered business or personal income. This determination would be made on a case-by-case basis.
Where a taxpayer mines cryptocurrency in a commercial and business-like manner, the value of the cryptocurrency coins mined would be included in the miner’s income for tax purposes. The upshot of taking the position that cryptocurrency mining is a business activity would be that any outlays to purchase computing equipment or expenses incurred for electricity could likely be claimed to reduce the net amount of mining income included in taxable income.
It may be possible that in some circumstances the mining of cryptocurrency could be treated as a hobby or a personal endeavour, and not subject to income tax. Be aware that the CRA cautions taxpayers that if a hobby is pursued in a “sufficiently commercial and business-like way”, it may be considered a business activity and taxed accordingly.
Adequate books and records should be maintained by those who transact with, trade or mine cryptocurrency to ensure compliance and proper recording of transactions for tax purposes. In addition, taxpayers who accept cryptocurrency for goods or services, or who pay for goods and services in cryptocurrency, should ensure that they have established a system for recording such transactions within the books and records of their business.
To ensure that cryptocurrency transactions are recorded properly, the CRA’s website identifies the principal records that should be maintained, including; the date of transactions, receipts of purchase or transfer, the value of the cryptocurrency at the time of transaction, and accounting or legal costs. In addition, those who mine cryptocurrency should also keep additional records in support of their cryptocurrency transactions.
In cases where an employee has been paid in cryptocurrency, the fair market value of the cryptocurrency at the time it was received must be included in the taxpayer's income for the relevant tax year. From the employer's perspective, if the employer elects to pay its employees in cryptocurrency, it is responsible for withholding and remitting an appropriate amount of source deductions to the Receiver General in respect of employment income.
With our increased reliance on transacting within the digital economy, it is not unreasonable to believe that you, or your business, may encounter transactions carried out in cryptocurrency. While some uncertainty does exist, there is no doubt that the CRA considers transactions involving cryptocurrency to be taxable events for Canadian income tax purposes.
Contact us if you have questions about how your cryptocurrency transactions may be taxed.
Christopher Ng
cng@bdo.ca
Debra Moses
dmoses@bdo.ca