Bitcoins are a type of virtual currency known as cryptocurrency and originally created by an anonymous computer programmer in 2009. Because Bitcoins are designed to allow for anonymous exchanges, they have become a cause for concern for income tax and other authorities the world over due to the potential for money laundering and other illegal activities.
Through the use of computers to create the Bitcoin in an online process called “mining”; Mining is a practice whereby a user sets up a personal computer to run processes and solve algorithms that “discover” new coins based on the architecture of the currency when it is created. Given the uncertainty surrounding the taxation of bitcoins in Canada, the tax consequences may be different depending on how they were acquired.
The CRA has not yet addressed the issue of Bitcoin tax in any of its Information Circulars or Interpretation Bulletins. In a March 2014 Technical Interpretation, the CRA provided some guidance and outlined its position regarding the income arising from Bitcoins activities.
When a taxpayer disposes of Bitcoins, they will be subject to taxation as either an income from a business source or as capital gains from disposition of property. Whether the gain is on income or capital account will depend on whether the taxpayer’s activities involving Bitcoins have sufficient commercial nature, as per the test in Stewart v the Queen, 2002 SCC 46.
This is to ensure that the full value of the goods or services received are accounted for in the taxpayer’s income. As an example, say a Taxpayer who owns a retail store purchases a product with a fair market value of $20.
Taxpayers who speculate in Bitcoins by buying and selling them using conventional currency will find that the income tax treatment is different from in a barter transaction scenario. Should a taxpayer choose to purchase and sell Bitcoins with an eye to making a profit, different rules apply.
In addition, in a Technical Interpretation issued in April 2015, the CRA noted that Bitcoins situated and held outside of Canada that are not used exclusively in the course of carrying on an active business would be ‘specified foreign property’. If a ‘specified foreign partnership’ holds Bitcoins situated and held outside of Canada that are not used exclusively in the course of carrying on an active business, and if a Canadian resident for tax purposes has an interest in the ‘specified foreign partnership’, then the resident must report the value in a T1135 Statement.
Prudent advice from our professional Toronto income tax lawyers is necessary to ensure that you do not fail in your reporting obligations. We cover how to calculate your taxes, how to minimize your capital gains, and what is required to be reported by the Canada Revenue Agency.
The Canadian Senate reviewed the issue of taxation of cryptocurrency already in 2014 to address the growing popularity. It should be clear now that if you have bought and sold bitcoin (or another cryptocurrency), you probably have to report this in your annual tax return to the CRA.
Business income is treated differently for tax purposes than capital gains. This might include preparing a business plan and acquiring capital assets or inventory.
You promote a product or service You have intentions to make a profit (even if you are unlikely to do so in the short term) A capital gain occurs when you sell a cryptocurrency for more than the original purchase price.
To calculate the capital gains you need to first establish the cost basis for the cryptocurrency you are disposing of. The capital gain for each transaction is then determined as the ACB value subtracted from the selling price.
For more information about how Adjusted Cost Base works (including the Superficial Loss Rule), see our detailed article covering this here: In this section, we will break down the current tax rules more in-depth and also explain with practical examples.
Selling cryptocurrency such as bitcoin for fiat currency (e.g. CAD) is considered a taxable event in Canada which is similar to most other countries. )To calculate his capital gains, Jacob needs to find the total cost basis for the 0.6 bitcoin he has sold.
Normally, the fair market value of the acquired cryptocurrency is used to determine the sales proceeds for each trade transaction. Stable coins such as Tether (USDA), True USD (TUSK) and Panos (PAX) are treated similarly to any other cryptocurrency by the CRA.
Instead of buying or selling cryptocurrency you actually own, margin trading lets you borrow funds from the exchange to speculate if the price will go up or down in the future. When you trade futures on an exchange like Bitter, you will open a position each time you make a buy or sell order.
A crypto tax solution like Coin panda calculates your capital gains for margin trading automatically, so you don’t have to do this manually. By using specialized hardware to solve complex mathematical equations, miners make it possible for me and you to transfer bitcoin and trust that it will be sent to the rightful recipient without the use of third party service.
To incentivize miners to do this (also called Proof-of-Work), they are rewarded with newly created bitcoins and also the fees paid for each transaction. Cryptocurrency received as payment for mining is subject to tax treatment in almost all countries, with Canada being no exception.
Again, the tax treatment depends on whether your mining activity is classified as a business or just a hobby. You can normally deduct any directly associated costs like electricity and computer hardware from your mining income.
You should also be aware that when you decide to sell the coins later, the sales proceeds will become part of your business income and taxed as such. If your mining is just a personal hobby, you will only pay capital gains tax when you later sell (dispose of) the received coins.
The Canadian Revenue Agency has not released specific guidance for staking of cryptocurrency. Similar to crypto received from mining, you should assume a cost basis equal to zero because you did not pay anything to acquire the coins.
A hard fork, on the other hand, can result in a blockchain split where new tokens come into existence. The Canadian Revenue Agency has not provided specific guidance for how cryptocurrency received from hard forks should be treated for tax purposes.
Again, a safe approach is to pay capital gains tax when you later decide to sell the coins and assume a cost basis equal to zero similar to airdrops explained above. In most cases, Coin panda classifies airdrops and hard forks automatically when you import your transactions from a wallet or exchange.
In both cases, a person typically invests in a token that will be released in the future and pays with another cryptocurrency like bitcoin or Ethereum. You will need to use the fair market value of bitcoin on the date you made the investment which will also become the cost basis for the newly purchased tokens.
If you have ever gifted crypto like bitcoin to another person or made a donation to a charity, we recommend that you contact the CRA directly or speak to a professional tax consultant in Canada. The CRA has not mentioned the tax treatment of crypto received as interest specifically.
Again, a safe approach is to apply the same practice as used for cryptocurrency received from mining, staking, airdrops, or hard forks. This means you will calculate capital gains only when you sell the coins in the future and assume an acquisition cost equal to zero.
Today, some employers are paying salaries in cryptocurrency instead of fiat (like CAD) to their employees. The CRA states that crypto received as payment for salary or wages will be included in the employee’s normal income.
Section 54 of the Income Tax Act indicates that a superficial loss occurs from selling cryptocurrency when both of the following two conditions are met: This might sound confusing, but simply put it means that a capital loss cannot be claimed if you buy the same cryptocurrency either 30 days prior to, or after, the disposition (when it was sold).
Without this rule, a taxpayer could reduce his or her tax burden by selling a cryptocurrency, trigger a capital loss, then immediately buy it back shortly after. It is important to mention that it is not illegal to buy back the crypto shortly after you have sold it.
To learn more about how the Superficial Loss Rule works, please refer to our detailed article which also includes several examples: This also applies to cryptocurrencies which means you need to file this form if the total value of your crypto assets exceeds the threshold during the tax year.
If you sell a cryptocurrency and receive less than the calculated acquisition cost using ACB, you will have realized a capital loss on the asset. If you have many transactions, deducting the fee amount can make a significant impact on your total tax liability.
However, most countries allow the taxpayer to deduct the original cost from their capital gains if they have been a victim of fraudulent actions or permanently lost access to their private keys. To calculate your cost basis correctly, it is important to include the history for ALL previous years.
Review your transaction data and make sure that the calculated balance matches your actual portfolio. Look up and assign market rates to all transactions which do not include Canadian dollars (Ex: ETH LTC).