Cryptocurrency taxation in Canada
Cryptocurrency or “crypto” has become a growing presence in today’s market. Constantly evolving, there is limited guidance on its tax treatment as the legislation attempts to catch up. Holders of cryptocurrency must understand the reporting obligations and Canadian tax considerations associated with it.
When to report?
Cryptocurrency should be reported in, but not limited to, the following situations:
- sale or gift of cryptocurrency
- crypto-to-crypto exchange or trade
- remuneration for goods and services
How to value cryptocurrency
For cryptocurrency that is traded often, the trading prices are typically reflective of the fair market value (FMV). However, for infrequently traded cryptocurrency, price reporting may not be regulated as often. These cryptocurrency transactions may be temporarily recorded on the private ledger, resulting in the FMV not being readily available on the public ledger for the taxpayer to refer to.
If the FMV cannot be determined due to public or private ledger issues, then the taxpayer should use the equivalent value of the goods purchased or the services performed.
For example, if the cryptocurrency was exchanged for legal services, the amount the lawyers would bill for their services would be the respective value of the cryptocurrency. This is known as a barter transaction which is discussed later on in this article.
In all cases, it is prudent to keep good records of the reasonable methods and steps taken to determine the value of the cryptocurrency. Each type of cryptocurrency held in your digital wallet must be valued separately.
How to classify cryptocurrency
Cryptocurrency transactions may be considered on account of business income or capital. Taxpayers must make a distinction between the two because Canadian tax treatment will differ. To make the distinction, we can assess the taxpayer’s behaviour to determine if one is carrying on a business or engaging in a capital transaction.
Some common signs that a taxpayer is carrying on a business include:
- repetitive activities that are continuous in nature
- actively promoting a product or service
- activities are carried out for commercial reasons
- performing business-like activities, such as purchasing capital assets
- purchasing goods with intention of selling them for a profit
Examples of cryptocurrency business transactions include, but are not limited to:
- cryptocurrency mining
- cryptocurrency trading/dealing
- cryptocurrency exchanges
Some common signs that a taxpayer is engaging in a capital transaction include:
- longer period of ownership of cryptocurrency
- reason for sale of cryptocurrency was due to unforeseen circumstances
- primary intention for purchase of cryptocurrency was to earn capital income
- low frequency of similar transactions being made
Examples of cryptocurrency capital transactions include, but are not limited to:
- casually buying cryptocurrency with a primary intention to hold for investment
- selling cryptocurrency due to change in employment status or health reasons
If you have determined your cryptocurrency transactions should be treated as business income, they will be taxed at a 100 per cent inclusion rate. Additionally, business losses on cryptocurrency can be used to offset any other sources of income, including employment income. Generally, business losses or non-capital losses can be carried forward 20 years and carried back three years.
Cryptocurrency transactions treated on account of capital will be taxed at a 50 per cent inclusion rate. Additionally, capital losses on cryptocurrency can only be used to offset any capital gains but cannot be used against any other income. Capital losses can be carried forward indefinitely and carried back three years.
Tax considerations for common cryptocurrency transaction
- Sale or gift of cryptocurrency
The sale or gift of cryptocurrency is treated as disposition of property. Cryptocurrency is valued at the FMV at the time of sale or donation and any capital gain or loss must be reported on your tax return. Taxpayers who gift cryptocurrency to a registered charity can receive a tax receipt which may be claimed as a tax credit on their return.
Example: You are looking to sell your cryptocurrency, which was originally purchased for $100,000 and has a current FMV of $300,000 at the time of sale.
Business income treatment: You must report net profits of $200,000 ($300,000 – $100,000) on your personal tax return because there is a 100% inclusion rate for business income.
Capital income treatment: You must report a capital gain of $200,000 ($300,000 – $100,000) on your personal tax return; however, only $100,000 ($200,000 x 50%) is taxable because there is a 50% inclusion rate for capital gains.
Example: You are looking to gift cryptocurrency that you originally acquired for a nominal amount to a non-arm’s length person for nil proceeds. It currently has a FMV of $300,000.
Capital income treatment: You must report deemed proceeds of disposition of $300,000, the FMV amount on your personal tax return in which only $150,000 ($300,000 x 50%) is taxable because there is a 50 per cent inclusion rate for capital gains. Additionally, the non-arm’s length person is deemed to have acquired the cryptocurrency at a cost of $300,000, the FMV amount.
- Crypto-to-crypto exchange
Crypto-to-crypto exchanges are treated as a barter transaction.
A barter transaction is when two parties exchange goods or services absent of legal currency. These transactions are considered a disposition and must be reported on your tax return. The taxpayer must convert the cryptocurrency’s value to Canadian dollars using a reasonable method.
Example: You are looking to purchase 1,000 units of Ethereum with a FMV of $100,000 for 200 units of Bitcoin with an equivalent FMV of $100,000. The 200 units of Bitcoin were originally purchased for $50,000.
Business income treatment: You must report $50,000 ($100,000 – $50,000) on your personal tax return because there is a 100 per cent inclusion rate for business income.
Capital income treatment: You must report $50,000 ($100,000 – $50,000) on your personal tax return; however, only $25,000 ($50,000 x 50%) is taxable because there is a 50 per cent inclusion rate for capital gains.
- Remuneration for goods or services
Cryptocurrency used as payment for goods or services is treated as a barter transaction. Income that the merchant reports must include the value of goods or services sold to an individual at arm’s length in a normal cash transaction.
Example: You are looking to pay for legal services using 25 units of Bitcoin, which were originally purchased for $20,000 and have a FMV $50,000. The legal services are equivalently valued at $50,000.
Capital income treatment: Generally, you are not in the business of converting cryptocurrency for legal services. Thus, we will apply capital income treatment for this example. You must report $30,000 ($50,000 – $20,000) on your personal tax return; however, $15,000 ($30,000 x 50%) is taxable because there is a 50 per cent inclusion rate for capital gains.
- T1135 Foreign Income Verification Statement – disclosure requirements
Taxpayers must disclose their cryptocurrency on and file Form T1135, when the total cost of all specified foreign property, including cryptocurrency classified as capital) exceeds $100,000 CAD.
There is no requirement to disclose cryptocurrency on Form T1135 when the earnings are considered business income as cryptocurrency would be considered inventory and therefore, excluded from the classification of specified foreign property.
Given the nature of cryptocurrency holdings, it is hard to determine whether it is foreign or not. In a 2015 CRA tax interpretation, the CRA stated that:
Digital currency would be funds or intangible property and would be specified foreign property of a person or partnership to the extent that it is situated, deposited, or held outside of Canada.
Unlike traditional assets, it is hard to say where your cryptocurrency is located. Is it where you keep your private key? Is it where the servers are? The CRA has not provided any further guidelines on this at the time of this article.
Related tax penalties
Failure to file the T1135 can result in a penalty of up to $2,500. However, taxpayers should be aware of the more serious omissions penalty. If the taxpayer filed the T1135 and knowingly omitted specified foreign assets, the penalty could be up to the greater of $24,000 or five per cent of the cost of the property.
If the taxpayer is uncertain as to whether to include their cryptocurrency, it may be beneficial to include the asset to avoid any potential application of omission penalties.
- Other non-income tax related issues
GST/HST
Recent amendments have provided more clarity to the classification of cryptocurrency and the GST/HST impact for parties who deal with crypto. The term, financial instrument, now encompasses virtual payment instruments.
According to the Excise Tax Act, subsection 123(1), a virtual payment instrument is a property that is a digital representation of value, that functions as a medium of exchange and that only exists at a digital address of a publicly distributed ledger.
Under these newly enacted rules, cryptocurrencies that are considered a financial instrument in the definition of virtual payment instrument are exempt from GST/HST. Treating cryptocurrency as a virtual payment instrument would deem the business, who transact cryptocurrency, a financial institution for GST/HST purposes. This mainly applies to businesses whose principal business involves trading or dealing cryptocurrency.
For businesses that accept cryptocurrency in exchange for goods or services, the business must collect GST/HST from purchaser and remit in cash. The GST/HST is calculated based on the FMV of cryptocurrency at the time of sale.
Payroll tax
Taxpayers who receive their wage in the form of cryptocurrency should report the value of cryptocurrency in Canadian dollars on their tax return. In addition, the employer must withhold and remit taxes in the form of cash, employees are not liable.
If you have any questions or need further information, please feel free to reach out to our Canadian Tax team.
About the author
Jessica Hum was a Junior Tax Specialist in our Tax group during her 2022 co-op term. She is currently completing her Bachelor of Accounting and Financial Management at the University of Waterloo.