Article written by Guillaume Surprenant, M. Fisc .
Although regular use of virtual currency is still not commonplace for the population as a whole, and it’s still very difficult to pay for daily expenses with cryptocurrencies in Canada, the fact remains that cryptocurrency use is already subject to Canadian tax laws and tax obligations. Below, Demers Beaulne discusses the tax treatment and taxation of the two main activities related to the use of cryptocurrency, i.e. cryptocurrency mining and transactions (buying, selling, exchanging) carried out with cryptocurrencies.
Is crypto taxable?
Taxation of cryptocurrency mining
According to the position of the tax authorities, the activity of cryptocurrency mining is considered to be the operation of a business. Thus, the taxpayer operating such a business must include the value of the virtual currency received from mining in calculating his or her business income. When the taxpayer subsequently sells the virtual currency, he or she must include the difference between the value at the time it was obtained (the cost) and the value at the date the cryptocurrency is disposed of (the sale price or at the time of exchange) in his or her business income. Consequently, it is essential for a taxpayer to be able to properly identify, track and document the value of the cryptocurrency received during the mining activity, as well as the value of the cryptos at the time of sale or exchange. Note that income from this activity is taxed 100% as business income, not 50% as a capital gain.
Taxation of cryptocurrency transactions
It’s also important to properly characterize transactions that involve cryptocurrency sales and exchanges in a transactional context where cryptos are held as investment securities.
Tax authorities currently consider transactions involving the sale or exchange of cryptocurrencies to be “barter” transactions. As a result, these transactions, whether cryptocurrency-to-cryptocurrency or cryptocurrency-to-currency, generate tax consequences.
How much should I declare in crypto?
To determine the tax implications associated with your transactions, it’s important to understand the circumstances surrounding the purchase and sale of cryptocurrencies. In fact, there are two possible tax treatments. Transactions can therefore generate capital gains taxable at 50% or business income taxable at 100%. To determine whether transactions result in a capital gain or business income, it is necessary to analyze the following eight factors as a whole.
1. Frequency of similar transactions
The more transactions a person carries out, the greater the chance that the income from these transactions will be considered business income.
2. Transaction value
The greater the value of cryptocurrency transactions, the more the transactions will be considered business income.
3. Detention period
The shorter the holding period, the greater the likelihood that the income will be considered business income.
4. Market knowledge
A person with in-depth knowledge of the cryptocurrency market has a greater likelihood of income from crypto transactions being considered business income.
5. Relation to the taxpayer’s usual activities
The more links there are between the crypto transactions and the taxpayer’s usual activities, the greater the possibility that the income from the transactions will be considered business income. For example, this would be the case if the taxpayer works in the brokerage business.
6. Time devoted to the activity
The more time a person devotes to this activity, the greater the chance that transactions will be considered business income.
7. Financing methods
In cases where the funding for the cryptocurrency purchase comes from financial institution loans, the likelihood of transaction income being treated as business income is increased.
8. The speculative nature of cryptocurrencies
The more a person holds cryptocurrencies for their speculative nature, the more income from transactions will be considered business income.
Once the analysis of these invoices has been completed, it will be necessary to examine their trend in order to assess whether the taxpayer’s situation requires taxation of the income as capital gains or as business income. It’s important to bear in mind that each situation is different, so tax obligations may differ. While the factors listed above help determine the qualification of cryptocurrency transactions, the analysis of the factors can be split. As a result, there is always a risk that the tax authorities will challenge the qualification given to transactions on a case-by-case basis. That’s why it’s important to keep documentation to this effect.
Supporting documents for your declarations
In addition, the Canada Revenue Agency (CRA) lists the registers and supporting documents to be kept:
- Transaction dates;
- Receipts for cryptocurrency purchases or transfers;
- The value of the cryptocurrency in Canadian dollars at the time of exchange;
- Registries of digital wallets and cryptocurrency addresses;
- The description of each transaction and the other party (even if it’s just their cryptocurrency address);
- Exchange registers;
- Accounting, legal and software costs associated with managing the taxpayer’s affairs.
Our team of tax experts is ready to help you determine the nature of income from cryptocurrency transactions, whether from mining activity or from buying and selling cryptocurrencies. Please contact us to discuss your situation.
