Bitcoin and other digital currencies have caused a lot of confusion for Canadians. As anyone that’s tried to explain a “blockchain” or a “distributed ledger” to a friend will tell you, these digital currencies are not the easiest to understand. Luckily, Bitbuy.ca has a great educational centre to explain all these tricky concepts. And now, we’d like to clear up all the confusion about taxes. What do Canadians need to know about Bitcoin (and all digital currency) taxes? Bitbuy.ca spoke with Kathryn Walker, a lawyer at Thorsteinssons Tax Lawyers in Toronto, about digital currency and tax obligations. The major takeaways are here, with the full explanations found below:
“There are all sorts of opportunity for tax avoidance, of course, but it’s tax fraud.” Even though Bitcoin transactions are anonymous, Canadian exchanges like Bitbuy.ca must adhere to Know Your Customer (KYC) regulations. These regulations crack down on money-laundering. Exchanges can be subpoenaed by the CRA or Canadian government to hand over customer lists and data, which would include all the users of an exchange and their transactions. The IRS took similar action with Coinbase, requesting records on all American customers. In the CRA’s words: “Not reporting income from domestic or foreign sources is illegal. Canadians should know that the Canada Revenue Agency (CRA) is very active in pursuing cases of non-compliance, in order to ensure that the tax system remains fair for everyone.”
CRA spokesperson Phillipe Brideau has said “When Bitcoins are bought and sold like a commodity, any resulting gains or losses could be income or capital for the taxpayer depending on the specific facts.” There is a big difference between income and capital gains. If money made via digital currency is classified as income, all profits or gains are taxed as income. Capital gains, on the other hand, are taxed on fifty percent of those profits or gains. Classification as capital gains would be advantageous for everybody, but the CRA looks at a number of factors to determine whether profits on digital currencies are the result of “work” (income) or of investments (capital gains). Walker echoed this statement a few times. In determining whether capital gains or income applies, the CRA will look at a number of factors, including: – Frequency of trades made – Average holding period of purchases – Amount of money being invested – Amount of time spent trading vs regular employment – Riskiness/ volatility of the investment from the set of facts the CRA has, there’s a spectrum between “work” and “investment.” On the one side is day-traders, people frequently buying securities, often selling them in the same day, and doing this as their main source of income. Day-traders pay income tax on their profits. On the other side, are people who have a job, and take some of their money and invest it – buying securities and typically holding them for months or years. When these people sell, any money they make is taxed at the preferred capital gains rate.
If, like most people buying cryptocurrency in Canada, you are buying as an investment, you may be subject to capital gains taxes. If you are buying and holding cryptocurrencies for a long period of time, like you would hold a stock or ETF, there’s a good argument to be made that your crypto purchase is an investment. If this is the case, any gains or profit made on the trading/ buying/ selling of digital currency are subject to capital gains taxes. Like any other commodity such as stocks or bonds, 50% of the gains would be subject to being taxed as income. This should also mean that if any digital currency is sold, (or “disposed of” in CRA terms), and results in a loss, these losses can be reported as capital losses to reduce your overall tax burden. It’s also worth noting that transaction fees can be discounted against capital gains, or added to capital losses.
The case for taxation as income as Kathryn pointed out: “Speculative investment is often understood to be income.” With digital currency being such a volatile market, the CRA is less likely to lump it in with ETFs and more stable securities. This is a major factor that the CRA considers when determining how something will be taxed. With many people buying digital currencies and selling them quickly for fast profits, the CRA has a strong case that digital currencies are primarily an asset being used for day-trading. “Tax rules apply to digital currency transactions. Using digital currency does not exempt consumers from Canadian tax obligations. This means digital currencies are subject to the Income Tax Act.” To add another quirk, Kathryn adds: “From a legal perspective, there’s only the Income Act, which doesn’t cover digital currency. There haven’t been any court cases yet, so there’s no case law.”
“Goods purchased using digital currency must be included in the seller’s income for tax purposes. GST/HST also applies to the fair market value of any goods or services you by using digital currency.” In other words, if you are selling goods or services, you should be charging GST/ HST on those goods, even if you are receiving Bitcoin as payment. To do that, take the value of the digital currency you received, in Canadian dollars, on the day the sale was made, and pay the GST/HST based on that amount. You don’t need to convert digital currencies into Canadian dollars when the sale is made, so long as you pay the tax on its value. This is important to remember when you use Bitbuy or any cryptocurrency platform to trade.
You might need to pay GST/HST AND income tax on that. As the CRA deems any “disposition” of an asset to be a taxable event, buying one digital currency using another may require GST/HST taxation. This is still a sort of murky area where the CRA hasn’t given any strong guidance. As we have yet to see any case law or concrete rules, it’s probably best to consult a lawyer on this, too.
People that are mining Bitcoin, Litecoin, or other digital currencies are also required to pay taxes. Any commodities (coins, tokens, digital currency) that are received from mining are almost certainly considered income. With an operation like mining, there is enough work, set-up, and (frankly) electricity costs that mining would be considered a job. In this case, the costs of mining can be set against gains. With the huge costs of GPUs and electricity to run mining operations, this should come as some comfort to miners.
For third-party software that can help you process your cryptocurrency-related tax obligations, try Koinly