Guide to CRA Bitcoin Taxation in Canada
About $20 million bitcoins have been mined to date, yet it is not classified as legal tender. Bitcoin does not function as money, but its promise to form a utopic future has captured the attention of many people. Its decentralized financial system has fed the imagination of the world. But so far, the goal is not yet achieved.
For the skeptics, its volatility is nothing but digital gambling. It can be compared to the Tulip Mania and other investment bubbles that eventually burst. Meanwhile, believers see it as a stepping stone towards a digital future. It remains the financial market’s latest fad, with more people gambling and considering it a precious item.
Given all these, an interested user usually wonders how much money is needed to join bitcoin trading. But as policy-makers try to regulate the market, another question arises. How do internal revenue agencies treat bitcoin?
An Overview of Bitcoin
Bitcoin does not require interventions from a central bank and other intermediaries. A bitcoin user can do the transactions with another user on the peer-to-peer bitcoin network. These are recorded in the system’s public ledger called a blockchain. It was invented by a person disguised as Satoshi Nakamoto in 2008. It began to circulate in 2009. Although it vastly differs from other forms of investments, risks are not limited. Despite this, it continues to grow substantially as a rising number of users enter its market. In a 2017 study conducted by the University of Cambridge, at least two million unique cryptocurrency wallet owners used bitcoins. Most of them joined the bitcoin market due to ideological reasons and convenience.
Amidst a growing number of users, it has become notorious for price volatility. A perfect example of it is the trend in 2011. The price started at $0.30 and grew to $31.50 before plunging to $11 in just a month. In 2013-2014, the uptrend in its price had become more evident as it skyrocketed from $13.30 to $770. Although the volatility remained, it continued to move upward and exceeded $10,000 in 2017. In 2018-2019, the fluctuation became unexpectedly higher as prices dropped substantially. But since the latter part of 2020, the price has become higher. Currently, bitcoin is set at $45,000 approximately, which shows the drastic changes in just a year.
It has also been subject to cybersecurity issues, leading to some people losing millions without traces. But it continued to entice more users as its potential remained high. From 2013 to 2021, its market capitalization has grown by more than a hundred times. From $1.54 billion to $716.34 billion, it became a giant that could transform the financial market. Since the circulation started, the average yearly growth reached 181.4%. In 2020-2021, the change was even higher at 297.5%.
The issues and criticisms surrounding it continue to increase as well. Nevertheless, bitcoin remains a staple investment for many traders. And one thing became clearer; bitcoin can increase a person’s wealth. That’s why the CRA considered digital currencies taxable. In 2020, a more precise guide for bitcoin taxation was released.
Is Bitcoin Taxable?
Bitcoin can be mined and traded digitally. Still, it does not fall within the functionalities of money. It does not serve as a store of account, a unit of measurement, and a medium of exchange. Even so, governments apply taxes to bitcoin and other cryptocurrencies.
Before, the only constant thing in this world is change. But over time, people have started to realize that tax is also a life’s constant. Taxes apply to everything, and bitcoin is not an exemption. Regardless of how you utilize Bitcoin, the fact that it generates income makes it ta x able. The Canada Revenue Agency views it as a commodity like gold and oil. According to CRA, if a seller receives bitcoin payments, his business income should account for the fair value of those goods and services. The US adheres to it, given that bitcoin functions similarly to properties and businesses. In short, digital currencies like bitcoin are also subject to taxes.
Countries like Canada and the US consider the following instances in taxation:
- Even if it is not sold, bitcoin acquired from mining is always taxable.
- If bitcoin is sold, cashed on an exchange, and used for purchasing goods and services, it will be taxable if it exceeded its fair value when it was acquired. Regardless of short-term and long-term rates, there are potential capital gains.
Whether tangible or intangible, taxes will apply as long as it generates income or gain.
Guide for Bitcoin Users and Tax Professionals
Reporting Business Income or Capital Gains from Bitcoin Sale or Disposition
An owner must determine how he sells or transfers bitcoin. Although taxation does not apply to owning or holding digital currencies like bitcoin, the following is subject to taxes:
- Selling bitcoin
- Bitcoin as a gift to another user
- Trading or exchanging bitcoin, including its disposition to obtain another bitcoin.
- Converting bitcoin to Canadian Dollars (CAD)
- Bitcoin for purchasing of goods or services
Bitcoin as Business Income
These are the common indicators that income generated from bitcoin transactions is considered part of business income:
- The activities done for commercial purposes generate income.
- The activities done by a bitcoin user are similar to a typical business setup. Some examples include business plan preparation and acquisition of working capital or assets.
- Promotion of goods and services
- An objective to realize income, regardless of doability in the short run.
Businesses have regularities and repetitions in their processes, although transactions must not be generalized. The date of the business establishment must also be noted. The preparation and setting up are not part of the actual business activities. Hence, income generated before the business officially starts is not taxable.
The following are some examples of cryptocurrency business:
- exchanges, including ATMs
Paragraphs 9 to 32 of Interpretation Bulletin IT-479R: Transactions in securities provide general information to help you figure out if transactions are income or capital gains. Although the discussion of income and capital in this interpretation bulletin is helpful, remember that cryptocurrencies are not Canadian securities under the Income Tax Act.
It means that if bitcoin is sold as part of a business, the realized value is part of business income and taxable. Buying bitcoin for future profits is also listed as part of business income. Bitcoin transactions as part of business income are reported via T2125 Statement of Business or Professional Activities.
Bitcoin as Capital Gains
If the sale of bitcoin is not part of the business process, the excess amount from the original price is capital gain. Capital gains from bitcoin sale or disposition are part of income for the year, but tax is levied only on half of it. Meanwhile, if a user incurs losses after selling the bitcoin, it can offset capital gains but not reduce taxes. If the value realized is purely losses, it will not be taxed and can be used to offset capital gains in the following year. Hence, capital losses purely serve to offset capital gains. These can’t be used to reduce other sources of income and taxes. It can be reported via Guide T4037, Capital Gains.
Trading Bitcoin for Another Bitcoin or Other Cryptocurrencies
Selling bitcoin in exchange for another cryptocurrency equates to a barter transaction. The generated value is converted to Canadian Dollars. It must be reported on ITR either as business income/loss or capital gain/loss.
Mining of Bitcoin and Other Cryptocurrencies
Specialized computers play an important role in bitcoin mining. They are used to solve complicated equations that will confirm bitcoin transactions as part of blocks. If the right number is estimated or guessed, it will create a new valid block and be included in a public ledger called a blockchain.
From there, the system will send two payments to the miner. These correspond to the creation of a new cryptocurrency and the fees associated with the new block. Whether it is a hobby or a business activity, it is subject to taxes since it generates income.
Valuing Bitcoin Either As Capital Property or Inventory
Taxes depend on how you value your bitcoin. If you hold your bitcoin and other cryptocurrencies as a capital asset, you must monitor the modified cost base for accurate reporting of capital gains. If you consider them as inventories, these techniques are used for consistent valuation:
- Value of each item at its acquisition cost or value at the end of the year, whichever is lower.
- At the end of the year, value the entire inventory at its fair market value (generally, the price of replacing an item or the amount receipt on its sale).
You may use alternative inventory valuation methods depending on the business nature. For example, properties listed as part of the inventory of an adventure business must be valued at their price when paid or acquired.
To determine which is lower, you must compare the cost and the fair market value of each item. The total value of your inventory at the end of the year is calculated using the lower amount for each item (or each class of things if specific items are difficult to separate).
“Cost at which the taxpayer obtained the property” refers to the initial cost of the inventory plus all reasonable costs expended to acquire that block of cryptocurrency.
Other Things To Remember
Keep Books and Records
You must retain records of your cryptocurrency transactions whenever you buy or dispose of cryptocurrencies. It includes companies that accept cryptocurrencies as a form of payment for goods and services.
Cryptocurrency exchanges have different policies regarding the types of documents maintained and how long they keep them. Suppose you utilize bitcoin exchanges and export data from them regularly to avoid losing information that you’ll need to report your transactions. You must keep records and documents for at least six years after the end of the tax year to which they pertain.
You should maintain the following records on your cryptocurrency transactions:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party (even if it is just their cryptocurrency address)
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs.
As a miner, keep the following records:
- receipts for the purchase of cryptocurrency mining hardware
- receipts to support your expenses and other records associated with the mining operation (the mining pool details and records
Various types of software are available for tracking cryptocurrency trades and maintaining records. The CRA does not recommend any particular software, so pick the one that works best for you in record keeping.
Under new tax laws, personal theft losses are no longer applicable. Hence, stolen bitcoins are no longer reported as theft loss on taxes. Another tax rule does not appear to be in favor of digital currency owners. The IRS permits owners to exchange properties for similar property types without incurring a tax burden right away. It is known as a like-kind exchange. Bitcoin users wanted to know if they could do like-kind transactions with other cryptocurrencies before the tax law changes.
Bitcoin continues to grow despite its volatility. The fact that it generates income or gains in various ways makes it taxable in Canada. If you are a bitcoin user or someone who wishes to join, you may reach out to our Canadian tax lawyers for more information.
Addition Information Related to Cryptocurrency
|Benefits of Using Cryptocurrency||
|Other Popular Cryptocurrencies Apart from Bitcoin||
|Examples of Popular Cryptocurrency Trading Platforms||
To know more about how Bitcoin and other cryptocurrencies are taxed by the CRA, talk to our Canadian tax lawyers today.
It’s always a wise idea to keep a record of all your cryptocurrency transactions, including important details like the date of transaction, description of the transaction, and any amounts involved.
FAQs on CRA Bitcoin Taxation in Canada
Can the CRA track Bitcoins?
Although the CRA does not endorse any particular type of software, it can track Bitcoins and audit bitcoin tax regularly.
How important are digital wallets when it comes to tracking Bitcoins?
Digital wallets help users create strong passwords, complete purchases, and monitor transactions.
Do I need to charge GST/HST on Bitcoin transactions?
Some goods and services exported from Canada are considered zero-rated goods or services under the GST/HST rules. Hence, you don’t have to pay or charge anything on your bitcoin transactions..