Cryptocurrency has become one of the hottest investment options in the last year. Many people are attracted to the exciting potential of this pioneering, decentralized technology. However, there is one major thing holding people back: The Unreliable Income Tax Conundrum.
For tax purposes, crypto is not currency. Crypto is property and a business asset (like stocks). The CRA has issued guidance on how taxpayers should report transactions involving virtual currency. When you buy or sell cryptocurrency, it's taxable just like most property transaction.
Cryptocurrency creators (Bitcoin, Dogecoin) set up these currencies as systems separate from any central bank, central authority, or government influence. However, cryptocurrencies are still considered commodities for the purposes of the Income Tax Act. In other words, when you receive Dogecoin and use it to purchase goods or services, the CRA considers this as a barter transaction. The CRA requires you to report any earnings or losses from these transactions on your income tax return.
When you sell a cryptocurrency for more than what you paid, the difference is considered a capital gain. If you sell for less, then this difference is considered a capital loss.
If you are the one who has sold a cryptocurrency for more than what you paid, then you owe taxes on this capital gain. If you are the one who paid less, then this is considered a capital loss. Capital losses are deductible against other capital gains.
When you buy a cryptocurrency, either directly or indirectly from someone else (for example, on an exchange), then the CRA treats this as a barter transaction. Since the value of the cryptocurrency has increased, any capital gains will be realized on the date you sold it.
If you are the one who bought the cryptocurrency and sold it for more than what you paid, then you owe taxes on this capital gain. If you are the one who paid less, then this is considered a capital loss. Capital losses are not deductible on your tax return like income losses.
When you trade one cryptocurrency for another type of cryptocurrency, the CRA considers this a barter transaction. Since the value of the cryptocurrency has increased, any capital gains will be realized on the date you sold it.
If you are the one who traded cryptocurrencies for another type of cryptocurrency and sold that one for more than what you paid, then you most likely owe taxes on this capital gain. If you are the one who paid less, then this is considered a capital loss. Capital losses are not deductible on your tax return like income losses.
Let’s look at some examples pulled from the CRA’s Guide for cryptocurrency users and tax professionals:
Crypto mining is the process of verifying transactions on a blockchain ledger by solving mathematical problems. In this way, a miner creates new cryptocurrency, which is then added to the digital ledger.
To mine cryptocurrencies, you need a powerful processing unit like an ASIC, or Application Specific Integrated Circuits. The processing power that ends up being used for this purpose is called hashing power (commonly expressed in megahashes per second). The faster your computer can compute hashes, the better chance you have of earning more bitcoins or other cryptocurrencies.
When it comes to cryptocurrency mining, it's a good idea to keep your capital loss and income loss separate. Capital losses can be used to offset capital gains, while income losses are deductible against any type of taxable income.
“The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity (a hobby) or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.” - from the CRA’s Guide for cryptocurrency users and tax professionals
Individuals who are income tax residents of Canada are taxed on their worldwide income, including any income earned from cryptocurrency mining. Be aware that due to the large fluctuations in daily activity across trading platforms, tax authorities may take the average of the opening and closing values of the day, and also average values across a number of major exchanges.
The Income Tax Act describes income as the total of all amounts, monetary or not, that a person receives for any purpose. What this means is that all amounts are subject to income tax, even if there is no cash involved. This applies to cryptocurrency mining.
Since every business activity has to report income and expenses, the first step in determining your tax liability is to determine whether your cryptocurrency mining activity is a business activity or not. Therefore, you need to determine whether:
Your cryptocurrency mining activities are carried out in a sufficiently commercial and businesslike way; and You have acquired the necessary skills and knowledge that would allow you to carry on these activities as a profession or business.
The CRA has indicated that cryptocurrency mining is a taxable business for Canadian tax purposes due to the fact that miners generate revenue from the sale of cryptocurrencies.
For additional information on how you can calculate your mining expenses and determine what kind of income tax treatment you should receive, please contact us today.
From the CRA's Guide for cryptocurrency users and tax professionals:
"Where a taxable property or service is exchanged for cryptocurrency, the GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
If your business accepts cryptocurrency as payment for taxable property or services, the value of the cryptocurrency for GST/HST purposes is calculated based on its fair market value at the time of the transaction.
Keep all records that show how you calculated the fair market value."
For additional information on how you can calculate your GST/HST, please contact us today.
"If you acquire (by mining or otherwise) or dispose of cryptocurrency, you have to keep records of your cryptocurrency transactions. This also applies to businesses that accept cryptocurrency as payment for goods and services." - from the CRA Guide for cryptocurrency users and tax professionals
From the same CRA guide, please see below:
You should maintain the following records on your cryptocurrency transactions:
If you are a miner, also keep the following records:
To sum up, the CRA expects you to keep track of all your cryptocurrency transactions. Get in touch with us today should any of the above speak to you - or if you just need help with understanding your specific situation. If you would like to learn more about how Elevate by Welch can help with bookkeeping and tax services for cryptocurrency, contact Sean at email@example.com
“There is light at the end of the tunnel as to the global pandemic and the havoc it has caused for Canadian business owners”, says Alex, he continues “it’s important to remain compliant with CRA regardless of your situation. My team, along with Elevate, want everyone to be as audit-proof as ready. We have helped countless businesses stay afloat and thrive despite the upheaval – let’s get to the finish line together and ensure all is in order”. Alex has provided the following information to help you get there.
Do any of the following apply to you:
CRA has indicated that the PD27 must be processed by them before the TWS credits claimed by the employer will be posted to the source deduction account. Consequently, the PD27 needs to be filed before the T4s are filed as it informs CRA of the discrepancy between the remitted amounts during the year and the tax deductions reported on the T4s. Failure to do so may trigger a Pensionable and Insurable Earnings Review (PIER) by CRA.
Part D of Form PD27 requires the employer to provide details of the calculated wage subsidy, and also provides a box for written comments to provide further details not included in the calculations. CRA will use this form to verify the TWS claimed as well as reconcile to the CEWS claimed, if applicable. Eligible employers who only claimed the CEWS are still required to file Form PD27, indicating in the comment box the lower percentage claimed.
If you have not yet reduced your remittances with the TWS, you can still calculate and apply for the subsidy using the Form PD27. Employers should indicate in the Additional Comments section of the Form how they would like to apply the subsidy. The three options are:
For each pay period identified on the form, the employer will need to provide the following information:
The self-identification form can be submitted online, by mail or fax. Online submissions are filed through CRA My Business Account. Parsing through payroll guidance can be daunting. If you are unsure of where to start, need help moving it along, or want to entrust us with the work, please reach out to us at firstname.lastname@example.org