Bitcoin Tax – The lack of official information on cryptocurrency and bitcoin taxation is not making Canadian taxpayers’ lives easier. The Canada Revenue Agency has stated in 2015 that crypto assets, including bitcoin, will be treated as a commodity/security and by virtue of that declaration, it applied a myriad of tax laws to the class of digital assets.
Since then no significant updates were issued and the interpretation of tax law was left to lawyers, accountants, and CRA auditors.
To add to the issue, there is a lot of misinformation floating around the web from self-taught and quasi-professionals. We suggest you to never take advice from someone you don’t know. Also, if you have a complex situation, please ensure that you speak to multiple professionals in the field.
Should we report the gains/losses from cryptocurrency and bitcoin trading?
Bitcoin Tax – Yes, as a Canadian resident you are obligated to report income from worldwide sources. Trading of cryptocurrencies is classified as trading of commodities by the CRA, so all gains and losses will need to be reported. Not reporting gains and losses from cryptocurrency trading is considered illegal.
How is the CRA going to find out about my cryptocurrency and bitcoin investments?
The CRA may not have the technological capability to track every single exchange at the moment. However, they do utilize time-proven strategies to find tax evaders. At some point in time, you will have to cash out or use those assets to do transactions which will leave “breadcrumbs” or traces in various databases. Here is how you would likely be caught:
- CRA Snitch-line: anyone can report you or your relatives anonymously to the CRA (beware of ex’s, friends, nice neighbours etc.)
- Cross-matching: if you are paying with crypto for certain goods (for example, on overstock.com) then you are leaving traces. An auditor who is reviewing that seller’s records can check if the buyer reported cryptocurrency on his/her tax return.
- Net wealth assessments: the CRA has a team that reviews social media profiles of Canadians and compares it to their tax returns. If you drive a Lamborghini, but only reported $10K in income last year, the CRA will have the legal power to include the cost of that Lamborghini on your tax return and tax you on it.
Is exchanging from one cryptocurrency into another a taxable event? e.g. sell Bticoin (BTC) / buy Etherium (ETH)
Bitcoin Tax – The answer is yes. Each exchange will create a taxable gain/loss. The calculation of gain/loss involves subtracting the Adjusted Cost Base (ACB) of the disposed of currency from the Fair Market Value (FMV) of the acquired currency.
You will need to know your ACB for each “bucket” of currencies at any given time to accurately to determine the amount of gain/loss for each trade or exchange.
What is the major difference between the treatment of gains as business income vs. capital gains?
From the investor’s/trader’s perspective there is no difference. Either you are making money at the end of the day or you are losing it. From the tax perspective, however, your gains/losses can be treated as capital (think passive income) or business income (think active income).
These two types of income are treated completely differently by the Income Tax Act and cannot be mixed together (we showed in very simple terms how these are treated in this post).
Where do I report capital gains from cryptocurrency and bitcoin trading on my personal tax return?
Bitcoin Tax -The gains/losses are reported on Schedule 3, Item 3 of the T1 personal tax return. You can list them as “Digital Assets”.
How is business income from crypto trading taxed?
If your gains are determined to be business income, then 100% of net gains must be included in your income. You can deduct business-related expenses such as a portion of the home office, computer costs, and hydro bills. Business losses can be carried 3 years back and 20 years forward.
Business gain/losses cannot be used to offset gain/losses from capital gains. These are two different animals from the tax perspective.
Where do I report business income from cryptocurrency trading on my personal tax return?
You report it on the T2125 form. You will need to include your total income as business income in Part 3A and related business expenses in Parts 4-7.
How can I determine if I have a business income or capital gains?
Bitcoin Tax – The CRA will apply a principle-based methodology to determine if you have a business income. There are eight criteria that your gains from cryptocurrency and bitcoin trading will be assessed on:
(a) the frequency of transactions – a history of extensive buying and selling of digital assets,
(b) period of ownership – digital assets are usually owned only for a short period of time,
(c) knowledge of securities markets – the taxpayer has some knowledge of or experience in the digital assets markets,
(d) digital assets transactions form a part of a taxpayer’s ordinary business,
(e) time spent – a substantial part of the taxpayer’s time is spent studying the digital assets markets and investigating potential purchases,
(f) financing – digital assets purchases are financed primarily on margin or by some other form of debt,
(g) advertising – the taxpayer has advertised or otherwise made it known that he is willing to purchase digital assets, and
(h) speculation – the transactions are normally speculative in nature.
No single factor will be determining the correct treatment. However, after applying the above tests your case will be leaning toward one or another possibility.
.Will I attract an audit if I report my cryptocurrency gains/losses?
Bitcoin Tax – There is no evidence that taxpayers who report these gains/losses have a greater likelihood of an audit. However, audits do happen, and you should be ready to defend your position with clear and consistent documentation, calculations and reasonings.
I haven’t cashed out of any of the cryptocurrencies. Am I still liable for tax?
In a very unlikely scenario, if you bought a position for holding purposes (e.g. 1 BTC) and never exchanged it into fiat money or other cryptocurrencies, then you there are no tax consequences.
However, if the Adjusted Cost Basis (ACB) of your positions has exceeded $100,000 CAD at any point in time during the tax year, you have to report them to the CRA on a special form T1135.
Is crypto and bitcoin mining income taxable?
Yes. Income from mining cryptocurrencies is considered to be taxable business income (not capital gains). You will need to apply the exchange rate that was in effect when the digital asset was earned.
The business income will need to be included on the form T1 (if running under sole-proprietorship) or T2 (if running a corporation).
I haven’t reported my cryptocurrency gains or losses, what options are available to me?
The CRA clearly distinguishes between two types of situations. One is when you were forgetful and missed to include income once (i.e. “it was an accident”).
The other one is when you did not file your returns or had repeatedly omitted income (i.e. “repeat offender”). Depending on your situation, there are two options available to you:
First, if you filed your returns but did not report some income only once, your accountant can file a T1-ADJ. You will end up paying outstanding taxes + interest.
Note that if the amounts are material, an adjustment to your tax return may attract an audit. So you should be prepared to fully justify and substantiate any changes you have made
Second, if you filed your returns but omitted income more than once in the last 4 years or you never filed your returns, your outstanding tax amount is subject to interest, late filing penalty, repeated failure to report penalty and potentially false statements/omission penalty.
The penalty amounts are extremely harsh and the taxpayer’s only option at this stage is to file an application under the Voluntary Disclosure Program (VDP).
What are the security valuation methods that are allowed in Canada?
There is only one method of valuation for securities trading that is allowed in Canada. And that is the Adjusted Cost Basis (ACB). FIFO and LIFO are not allowed. ACB calculations can become very costly depending on the number of trades.