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 firstname.lastname@example.org
How does it work? Read on to find out, and feel free to reach out to your Elevate by Welch professional to learn more and ensure you optimize your 2020 tax return.
To claim a home office expenses deduction, you must meet all of the criteria:
If you meet the eligibility criteria, you have two options to calculate the deduction for home office expenses:
Employers may suggest a method for their employees. It is the employees who have the ultimate authority to choose which method to use.
What is it?
If you worked more than 50% of the time from home for a period of at least four consecutive weeks in 2020 due to COVID-19, you can claim $2 for each day that you worked at home up to a maximum of $400 (200 working days) per individual.
If working at home and claiming home office expenses was the norm for you pre-COVID-19, you cannot use the temporary flat rate method to complete your 2020 claim.
What counts as a work day?
Days you worked full-time hours, overtime-hours or part-time hours from home.
Days that cannot be counted: days off, vacation days, sick leave days, other paid or unpaid leave of absence.
Do I need from my employer a certified Form T2200 Declaration of Conditions of Employment or Form T2200S Declaration of Conditions of Employment for Working at Home Due to COVID-19?
Do I need to retain documents in support of my claim?
How to claim?
You would need to complete the “Options 1 – Temporary flat rate method” section on Form T777S Statement of Employment Expenses for Working at Home Due to COVID-19.
Is the deduction calculated by the individual or by the household?
Each employee working from home who meets the eligibility requirements can use the temporary flat rate method to calculate his/her deduction. If there are more than one eligible employee working at home in the same household, each can choose his/her method to calculate the deduction.
What types of expenses are covered by the $2 flat daily rate?
The temporary flat rate method is used to claim home office expenses that you paid like rent, electricity and home internet access fees, as well as office supplies like pens and paper, and cell phone minutes.
Under this method, you cannot claim any other type of work-space-in-the-home-expenses, home office expenses or costs for items purchased of a capital nature.
Can I claim any other employment expenses?
No, you cannot claim any other employment expenses such as allowable motor vehicle expenses, parking, travelling expenses, etc.
Is the up-to-$400 a credit or a deduction?
Home office expenses can be claimed as a deduction on an employee’s personal income tax return. A deduction reduces the amount of income they pay tax on, so it reduces their overall income tax liability.
Will the temporary flat rate method be extended past 2020?
No. The temporary flat rate method only applies to the 2020 tax year.
What is it?
If you meet all of the criteria listed above under the “Eligibility” section, you may use the detailed method or the existing method to deduct home office expenses.
Do I need a certified Form T2200S or Form T2200 from my employer?
Form T2200S is a new simplified form for employers to complete and sign for employees who meet the eligibility requirements and who choose to use the detailed method.
If an employee pays for other employment expenses, such as allowable motor vehicle expenses, parking, travelling expenses, the employer must complete the traditional Form T2200.
For 2020 only, the CRA will accept an employer’s electronic signature on Form T2200S or Form T2200.
Do I need to retain documents in support of my claim?
Yes. Generally, you must keep all required records and supporting documentation for a period of six years from the end of the last tax year they relate to.
How to claim?
You can claim the actual working-at-home eligible expenses you paid that are supported by documents. Eligible expenses will be detailed out in the “Options 2 – Detailed method” section on Form T777S Statement of Employment Expenses for Working at Home Due to COVID-19.
How to determine the employment use of work space?
Whether you work in a spare room exclusively used as your work space at home, or at the dining table sometimes or at the kitchen table other times, there are several factors to consider when calculating the employment use of the work space at home, for example:
The CRA may accept a method of calculation other than one based on square meters (feet), as long as you are able to demonstrate to the CRA that your calculated percentage of use is reasonable.
What are eligible expenses?
Commonly seen eligible work-space-in-the-home expenses and other home office expenses include:
The CRA has expanded the list of eligible expenses that can be claimed to include home internet access fees.
Note that salaried employees cannot include the expenses paid pertinent to home insurance, property taxes and mortgage payments (principal and interest) in calculating the home office expenses.
Can I claim any other employment expenses?
If you are eligible to deduct home office expenses by meeting the requirements listed in the “Eligibility” section above, you would use T2200S and T777S forms to complete the claim. You cannot claim other employment expenses such as allowable motor vehicle expenses, parking, travelling expenses, etc.
If you are eligible to deduct home office expenses by applying the traditional criteria, which are outlined in the CRA Guide T4044 Employment Expenses, you would use T2200 and T777 forms to complete the claim. You can claim other employment expenses such as allowable motor vehicle expenses, parking, travelling expenses, etc.
The CRA has expanded its previous position (2020- 0845431C6 (F)) on employer reimbursement of personal computer equipment to include home office equipment. In the COVID-19 context, the CRA will not consider an employee to have received a taxable benefit where their employer pays for or reimburses up to $500 of computer or home office equipment that enables the employee to carry out their employment duties by working at home. To be treated as a non-taxable benefit, the employee must submit receipts to the employer. The CRA indicates that home office equipment would include items such as desks or chairs.
Jessica Zhang-Chapman, CPA, CGA, CIA, of Welch LLP illustrates it perfectly with a great example:
“ For example, if an employee purchased a second computer monitor for $300 plus an adjustable desk for $400, and the employee submitted receipts in support of the purchases, an employer can reimburse the employee up to $500 without the employee receiving a taxable benefit under the CRA administrative policy in the COVID-19 context. If the employer reimburses the full $700 for the purchases, the amount over $500 (that is, the $200) must be included in the employee’s income as a taxable benefit”
Parsing through tax guidance can be daunting. If you are unsure of where to start, need help moving it along, or want to entrust us with your personal taxes, please reach out to us at email@example.com