It’s everyones favourite time of the year! Tax season! Bitbuy gets a lot of questions about how cryptocurrency gains or losses are taxed, and we’ve published this updated 2020 tax guide to help you out. This is a big update from our previous tax guide from 2018, as some key things have changed in the Canadian space.
Please note that this article does NOT constitute official tax advice. It has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for personal tax, legal or accounting advice. You should consult your own tax planning professional regarding your personal tax circumstances.
Yes – there are tax consequences you should be aware of when you engage in ANY of the following taxable crypto events:
Digital currencies, including cryptocurrencies are subject to the Income Tax Act and this means that transactions involving Bitcoin (BTC), Ethereum (ETH), or other alt-coins does not exempt consumers from Canadian tax obligations.
Despite what the term suggests, cryptocurrency is not recognized by Canadian law as “currency.” Instead, the Canadian Revenue Agency (CRA) treats Bitcoin and other crypto assets as a commodity equivalent to investment property such as a stock ownership for tax purposes. Any gains or loses arising from an individual’s cryptocurrency portfolio are thus taxed in the same manner as any other commodity investment in Canada. Depending on your circumstances, the income you get from disposing of cryptocurrency may be considered business income or a capital gain and must be reported as either property income or business capital.
Whether your digital currency activity can be classified as business income or capital gains makes a large difference on the amount of tax you owe.
For the average buy and hold investors who are generally not selling cryptocurrency as a means to carry on a business, 50% of the value of your gains are taxable and added to your income for the year. This means that if you sell your crypto for a higher price than the original purchase price or its adjusted cost base you have realized a taxable capital gain and will need to add 50% of the capital gain to your income. Capital losses resulting in a sale can be used to offset against capital gains (not other income such as employment) and can also be carried forward if you do not have any capital gains against which to offset those losses for the year or any of the preceding three years.
If your trading activity is determined to be income, all profits or gains will be taxed as business 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).
However, based on the nature of your cryptocurrency activity, i.e. if you appear to operate as a day trader, the CRA may consider your transactions to be a business with profits taxable as business income instead of a capital gain.
When determining whether you are acting in a personal or business capacity, the courts and the CRA consider a number of factors to be relevant, including:
In addition, the CRA has listed the following are common signs that you may be carrying on a business:
However, each situation has to be assessed separately. While business activities normally involve some regularity or a repetitive process over time, buying cryptocurrency in an isolated incident may be treated as business income if there is an intention of selling it for a profit because it could be considered an adventure or concern in the nature of trade.
While crypto is not considered legal tender, the CRA acknowledges that individuals can and do use it as payment for goods and services. Treating cryptocurrency as a commodity means that these types of transactions are classified as a bartering transaction.
A barter transaction occurs when any two persons agree to exchange goods or services and carry out that exchange without using legal tender.
Not a surprise to anyone, the CRA takes the position that such barter transactions fall within the scope of the Income Tax Act. As a result, payment in cryptocurrency does not exempt merchants from recognizing income on a sale, as the CRA has made it clear that the value of any goods and services bought using cryptocurrency is to be included within the seller’s income for tax purposes. In addition, GST/HST registrants also have an obligation to collect and remit Goods and Services Tax (GST).
Although liability for tax is levied against the purchaser, generally the obligation to collect and remit falls on the seller or vendor. When accepting cryptocurrency as payment for a taxable good or service by a GST/HST registrant, the GST/HST is calculated based on the fair market value of the consideration received for the good or service.
For example, if a pizza shop in Toronto accepts Bitcoin as a form of payment, the pizza vendor must determine what the fair market value of the cryptocurrency and the item sold is in Canadian dollars at the time of the transaction. Accordingly, the value of the pizza bought using cryptocurrency must be included in the pizza vendor’s GST/HST return as revenue in Canadian dollars with the applicable amount of GST/HST. Similarly, as described above, those who exchange cryptocurrency for merchandise or goods must report income or a capital gain/loss on the disposition of their crypto asset.
Previously, before cryptocurrency reached mainstream usage, determining the fair market value of a crypto transaction would have been relatively difficult with no recognized standard to reference. Today however, technology such as Bitbuy’s currency converter site can conveniently provide an accurate Canadian dollar value equivalent of most cryptocurrencies.
If you either accept cryptocurrency for goods or services or pay for goods and services using cryptocurrency it is your responsibility to ensure that you are being compliant with the applicable tax regulations. As such, any taxpayer who engages in these activities should establish a system for recording transactions including calculations of fair market value within their books to mitigate against any errors.
The CRA recommends that anyone who acquires (by mining or otherwise) or disposes of cryptocurrency, should maintain the following records on such transactions:
It is important to point out that the barter rules also apply to crypto-to-crypto trades between the main coins such as Bitcoin exchanged for Ethereum but also for smaller cryptocurrencies, sometimes called alt-coins. Thus, it is crucial to be conscious of the potential for taxable events to be created whenever cryptocurrencies are traded and not just when “cashing out” in fiat currency. The value of cryptocurrency you receive must be converted into Canadian dollars and the resulting gains/losses must be reported on your income tax return as either business income (or loss) or capital gain (or loss).
Cryptocurrencies that are situated, deposited or held outside of Canada are also subject to reporting requirements for Canadian tax purposes. Indeed, since Canadians are taxed on their worldwide income, not just their funds in Canada, even if the cryptocurrency platform you use is foreign, you are still obligated to report the realization of any profits when you trade. Accordingly, Canadian taxpayers holding cryptocurrency outside of Canada that has at any time exceeded $100,000 CAD within the year should be aware of their obligation to file Form T1135 to report the property.
It is important to remain cognizant of your transactions since not reporting income, including income from the sale of bitcoin, ethereum, ripple or other crypto is illegal and could result in interest on unpaid taxes among other penalties.
In March 2019, Forbes published a report stating that some Canadian cryptocurrency users had been targeted by the CRA with audits. According to one law firm, there had been at least 60 taxpayers assessed and that number is expected to rise dramatically as the CRA gathers more information.
Just a few months later, a statement by the CRA issued June 2019 as a guide on the applicability of tax lws to cryptocurrency, the government formally expressed its commitment to ensuring cryptocurrency is taxed in accordance with the law.
“Canadians should know that the Canada Revenue Agency is very active in pursuing cases of non-compliance, in order to make sure that the tax system is fair for everyone.” – Canadian Revenue Agency
The crypto investors targeted by the audits in March were required to fill out an extensive 13-page questionnaire on their cryptocurrency usage to determine whether the taxpayer had reported and paid the correct amount of income tax.
Under sections 231.1 to 231.4 of the Income Tax Act the CRA has broad powers to investigate and demand information from taxpayers. Although this investigative power is not absolute, the actions of the American Internal Revenue Service (IRS) may foreshadow what is to come for Canadian taxpayers. In November 2017 the success of a court order brought by the IRS, forced Coinbase, an American cryptocurrency exchange to turn over information on its users. The petition by the IRS had been instigated on the basis that Coinbase advertised that its platform served 5.9 million customers through more than $6 billion in transactions, despite only 800-900 taxpayers reporting gains related to crypto from 2013 – 2015. Canadian tax authorities may similarly require online exchanges to provide documentation on its users if it believes compliance with tax regulations is not sufficient.
While the emergence of cryptocurrency initially allowed users to transact without much interference, regulators have increasingly cracked down on its oversight. Despite its initial attraction of being “anonymous,” as crypto continues to shape global financial markets, attention from tax authorities is unavoidable. While this may take away from the potential profits seen in the early transacting days, the increased scrutiny is favourable in the long term in the sense that it adds structure, transparency and legitimacy to the crypto world. Long story short, crypto is not a place to hide your assets, taxation is certain and you should probably abide by the law. To read more about the regulatory landscape surrounding the crypto check out some of our articles in our resources page.
With our new reporting feature, Bitbuy customers can generate and download detailed reports for activity by year of their Bitbuy account.
To access your reports, log in to Bitbuy, then click on your name in the top right corner to open your settings tab. Scroll down and you’ll see “End Of Year Reports”. Simply click download and a CSV download will prompt.
You can either provide these reports to a tax professional or account or upload them to quick books or another personal tax software. For more information on how to calculate gains and losses on commodities trades in Canada please refer to this article.
Keep in mind that these reports only provide your transactions associated with your Bitbuy account. If you used other exchanges either concurrently with Bitbuy or prior to using Bitbuy you must download similar reports from them.
The CRA released it’s own guide for paying crypto related taxes, which can be found here.
DISCLAIMER: This article is not meant to provide individualized advice and is meant for informational purposes only. Please consult with a tax-planning professional regarding your individual reporting obligations.
Articles like this one in your inbox every week.