As the popularity of cryptocurrencies such as bitcoin and Ethereum has grown, they have attracted a lot of attention from the media, investors, and the government. Cryptocurrencies are in use in various jurisdictions, but their very nature makes it hard to tax them. This makes it difficult for a lot of people who would like to report taxes on cryptocurrencies, since it can be very confusing and challenging. However, the Canadian government has come up with a guideline on how cryptocurrencies are taxed in the country. Below, we are going to look at the Canadian government’s definitions and guidance concerning cryptocurrencies.
Cryptocurrencies According to the Canadian Government
While there are lots of definitions among the people who use, trade, exchange or are involved with cryptocurrencies, the Canadian government has a standard definition. It defines cryptocurrencies as a digital representation of value and not a legal tender. The Canadian government also refers to cryptocurrencies as digital assets that can be used in the exchange of goods and services. This exchange has to happen between parties who understand what cryptocurrencies are and in conditions that mimic those of a fair market.
How to Acquire Cryptocurrencies
The way the cryptocurrency you hold is taxed in Canada depends on how you acquire it and what you do with it once you have it. There are three main ways of acquiring cryptocurrencies: mining, purchasing or trading, and as a unit of exchange for goods and services.
Mining involves setting up computers and complex software to try to solve algorithmic and mathematical equations. Once a problem is solved, it is verified and, if it passes, the person who provided the solution is rewarded with cryptocurrency. This is a simplified version of how it all happens as the process is a lot more complicated than what is discussed here.
If you want to buy or sell cryptocurrency, the main way of doing so is through an exchange. As their name suggests, you exchange cash for cryptocurrencies, although you can exchange one cryptocurrency for another. Once you find a suitable cryptocurrency exchange and make the purchase, the cryptocurrency bought will belong to you. You can then hold on to it to sell at a higher price or use it to buy goods and services.
Also, you might find people willing to accept cryptocurrencies for something they would like to offload. This means if you want some cryptocurrency, you can find someone willing to give you some in exchange for something you are looking to sell.
Capital Gain Vs. Business Income
In Canada and many other countries around the world, cryptocurrencies are subject to either capital gains tax or business income tax. Capital gains is the increase in value or the price of an asset. For cryptocurrencies, this is the difference between the selling price and the purchase price of the cryptocurrency.
Capital gains tax in Canada applies to 50% of your capital gains. This means that if you sell some Bitcoin for a CAD1000 profit, you pay capital gains tax on CAD500. To get the values to use in these calculations, you need to obtain data from a reputable source. Many people choose the rates and prices at the cryptocurrency exchange where they bought the crypto or where they sold it.
If you obtained the cryptocurrency another way, for example, as a gift, you will need to use a price aggregator to get a fair rate or price for the cryptocurrency. Do remember that the Canada Revenue Authority does not have a hard rule on where you get the valuation. They say a fair price is the highest price a willing buyer and seller decide upon in a free, fair, and unrestricted market.
If you are dealing with cryptocurrencies as an individual, you will need to pay capital gains tax. Things are very different when you handle cryptocurrencies as a business. Although the Canada Revenue Authority decides what a business or a business transaction is, some indications that you are involved in business activities include selling cryptocurrencies with the aim of making a profit, advertising any products and services, operating in a business-like manner, and when your activities are deemed to be commercially viable.
Another area of confusion is speculation. If you buy and sell cryptocurrencies, you are of course supposed to report that as a capital gain. However, if you do this more than a handful of times in a year, the government may say you are speculating on the price of a cryptocurrency to make a profit and so decide to tax your capital gains as business income.
The Canadian Revenue Authority taxes 100% of this business income depending on the prevailing taxation rates of where you live or conduct your business.
For individuals who mine cryptocurrency to sell, it can be confusing whether to report their income as capital gains or business income. This guide on cryptocurrency taxes in Canada by WealthSimple goes into a lot more detail to help you understand where you stand. WealthSimple has several financial and investment tools to help you build your wealth and help you grow your money, including their WealthSimple Crypto Tool. Their team of financial experts offer investors advice on how to build their portfolio and WealthSimple even gives you a free stock to help you get started.
Starting a Business
Individuals are not deemed to be operating as a business if they do not fulfill the criteria set by the CRA. Also, they are not deemed to have started a business even when they are thinking about it but have not finalized the process. So, when is an individual deemed to have started a business?
The Canadian government has a lengthy process that requires significant activity before you can declare you have gone into business. If you are still in the process of starting the business but have not completed the process, have not prepared to go into business, or have not started transacting as a business, you are not deemed to be a business.
Every financial or asset assistance you receive during this period is not deemed business income and so you do not have to report it. Similarly, you cannot claim income tax deductions for everything acquired before you became a business. When trading at this point, you might still be in the right by filing capital gains tax.
Types of Cryptocurrency Businesses
To ensure there is no confusion as to what a cryptocurrency is and is not in Canada, the government has put forward the three obvious types of cryptocurrency businesses you can start. The first is cryptocurrency mining businesses. Many individuals mine cryptocurrencies as a hobby and that is not a problem for the government. It is when you start operating as a business (undertaking business-like activities, mining for commercial reasons, etc.) that the government deems that you have started a crypto mining business.
There is no ambiguity when it comes to cryptocurrency exchange since Crypto exchanges allow people to buy, sell, or exchange cryptocurrencies for a small fee for all transactions. Cryptocurrency ATMs are deemed to be in this category because they allow for the exchange of cryptocurrencies with fiat currencies, with the company behind the ATMs charging a small fee for these transactions.
Lastly, we have cryptocurrency trading, which is also known as speculation. The premise is simple: buy low, sell high for a profit.
Getting Paid in Cryptocurrencies
As you know, you need to report income tax for all paid work, but what happens when you are paid in cryptocurrencies? Well, the first thing to do is to collect all the relevant documentation surrounding the exchange or transfer. These include the date, the receipts for the transfer, the value of the cryptocurrency at the time of transfer, details of the exchange’s purpose and the details of the other party, the exchange records, the software used to manage your tax affairs, and all costs associated with the transfer.
All of these records are required because such a transfer is considered a deposition of the cryptocurrency and so you have to show that on your tax returns.
Because cryptocurrencies are a digital asset instead of a legal tender, all transactions made using them are regarded as barter transactions. This means they are a fair exchange of products or services with something the other party deems to be valuable (a cryptocurrency).
For taxation purposes, the value of the cryptocurrency has to be reported in Canadian dollars using the methods discussed above. The value of the products sold is then reported and used for tax purposes. These conversions happen because cryptocurrencies are not official currencies and so a government cannot vouch for their values; they can only derive their value from the market or from the products and services they were exchanged for.
We have taxation systems for established currencies and other areas of our lives that have been working really well for a very long time. Cryptocurrencies are still relatively new and this is why their taxation is so confusing for a lot of people. The guide above is meant to serve as a general overview, but do talk to your lawyer or a taxation professional if you want more information about cryptocurrency taxation.