Insights & Resources

As we’ve covered before, cryptocurrency can be an attractive investment. We’ve spoken about it in the past, discussing what cryptocurrency is, why everyone is so excited by it, and how one can invest in cryptocurrency. 

However, one element that is not often discussed is how cryptocurrency gains or losses are taxed. To help you, this article will cover some of the basic elements of tax applications to cryptocurrency, with the assistance of a bitcoin decode bot.

Can Cryptocurrency Be Taxed?

The first question we need to answer is “can cryptocurrency be taxed?” The answer to that is “yes”. According to the Canada Revenue Agency (CRA), cryptocurrency is treated like a commodity for the purposes of the Income Tax Act. Any income from any transactions is generally treated as business income/losses or as a capital gains/losses depending on the circumstance (more on that later).

It also depends on if your cryptocurrency activity results in income or capital, because this will affect the way the revenue is treated for income tax purposes. Note, however, not all individuals who buy and sell cryptocurrency are carrying on business activity.

How Does Cryptocurrency Get Taxed?

Similar to traditional investments (i.e. stocks, mutual funds, ETFs, etc.), cryptocurrency has a number of scenarios that would trigger a taxable event. While holding a cryptocurrency is not a taxable event, according to CRA there may be tax consequences if you do any of the following:

• Sell cryptocurrency, including converting cryptocurrency to Fiat currency (i.e. Canadian dollars)
• Trade or exchange cryptocurrency (including selling one cryptocurrency in order to buy another one)
• Gift cryptocurrency to someone
• Use cryptocurrency to buy goods or services

Is it Income? Or Capital Gains?

To determine whether the income you get from disposing (or selling) your cryptocurrency, we first need to establish what type of income it is. If you are disposing of cryptocurrency as part of a business, the profits you make on the disposition or sale can be considered business income and not a capital gain. Take note however, that some common non-business activities can be considered as business activities (however this is decided case by case):

• Cryptocurrency mining
• Cryptocurrency trading – i.e. buying cryptocurrency with the intention of selling it for a profit
• Cryptocurrency exchanges

If the sale of a cryptocurrency does not involve carrying on a business, then the sale can be recognized as a capital gain (or loss, depending on if the amount it sells for is more than the original purchase price, or its adjusted cost base). Similar to traditional investments, capital gains from the sale of cryptocurrency are generally included in income for the year, but only half of the capital gain is subject to tax. Any capital losses resulting from the sale can be used to offset capital gains. 

What About Trading One Crypto for Another?

A common scenario with cryptocurrency is when one trades one cryptocurrency for another (i.e. trading Bitcoin for Ethereum). In this exchange, when you dispose of one type of cryptocurrency for another, the barter transaction rules apply. In this scenario, you must convert the value of the cryptocurrency you received into Canadian dollars. As such, the translation is considered a disposition, and you have to report it on your income tax return as either a business income (or loss) or capital gain (or loss), depending on the scenario we discussed above. For those considering investments, navigating through the myriad options and determining the best cryptocurrencies to invest in can be a daunting task.

Other Tax Rules

There are other tax rules to note that we will touch on briefly here:

• When cryptocurrency is used to pay an employee: the amount (in Canadian dollars) will be included in the employee’s income per the Income Tax Act
• When cryptocurrency is earned from mining: depends if the mining is pursued as a hobby vs. a business activity (treatment depends as we’ve discussed above)

Tax Preparation

If you buy, sell, or trade cryptocurrency, we highly recommend you keep records of your cryptocurrency transactions. Most cryptocurrency exchanges have some sort of historical record keeping, but each have different standards for the kinds of records and how long they hold them. Some details to consider keeping records for include:

• Date of transactions
• Receipts for any purchases or sales of cryptocurrency
• Value of the cryptocurrency in Canadian dollars at the time of the transaction
• The digital wallet records and addresses

In Closing

As we’ve mentioned in our previous article, cryptocurrencies are a very volatile high-risk/high-reward investment vehicle. Understanding how cryptocurrencies are taxed is an important part of owning this type of investment. While you cannot directly hold a cryptocurrency in a tax-sheltered account (TFSA), there are ways to invest in this asset class in a tax-sheltered manner. With the widespread adoption of cryptocurrencies, several ETFs (Exchange-Traded Funds) have launched that track these digital assets. Two of these include CI Global Asset Management’s cryptocurrency funds:  

• CI Galaxy Bitcoin Funds
• CI Galaxy Ethereum Funds

Cryptocurrency  ETFs can be purchased from within your tax-sheltered accounts (such as your TFSA), which can help avoid paying taxes on the capital gains as per the tax rules that apply to the tax-sheltered accounts. By investing in these cryptocurrency funds, you get exposure to this emerging asset class to diversify your portfolio, without the hassle of keys, wallets, cloud storage, or the need to convert to cash. The funds are also only invested in the coin for the fund (Bitcoin or Ethereum).

If you would like to explore investing in Bitcoin, Ethereum, or review your existing portfolio and how cryptocurrencies may fit in your investment strategy, please schedule a consultation or contact us. We would be pleased to speak with you.