Transactions involving cryptocurrency (“crypto”) have soared in popularity over the last decade. Guidance from taxation authorities has at times been unclear or non-existent. Guidance has also changed somewhat rapidly as crypto users have proliferated and transactions have become more complex.
Despite its name, crypto is not actually treated as a currency for tax purposes in Canada – instead it is generally treated like a commodity, like gold or oil.
Crypto transactions with potential tax consequences
There are likely tax implications to numerous different types of crypto transactions, including:
- Selling or gifting crypto;
- Trading one type of crypto in exchange for another type of crypto;
- Using crypto to purchase goods or services;
- Converting crypto to fiat currency.
Type of income/loss – business or capital
Transactions using cryptocurrencies are treated as either business income/ business losses or capital gains/ capital losses, depending on the circumstances. There are differing tax implications to business income/losses vs capital gains/losses, perhaps most significantly that only 50% of capital gains are taxable under current income tax rules.
A taxpayer must determine whether they are carrying on a business in relation to crypto transactions. Factors indicating that a taxpayer is carrying on a business include:
- History of frequent buying and selling of crypto;
- History of short holding periods;
- Significant knowledge of crypto markets;
- Taxpayer is engaged in another business or employment related to crypto transactions;
- Substantial time spent studying and/or trading crypto;
- Crypto activity is financed by debt;
- Taxpayer acquires capital assets or inventory related to crypto activity;
- Taxpayer promoted a product or service related to crpyto.
When a taxpayer undertakes a barter transaction, the taxpayer has a taxable disposition of property and reports this transaction either on account of income or on account of capital. The value of the transaction is equal to the more readily valued of the goods or service given up and the goods or service received. In barter transactions involving crypto, it is likely that the value of the crypto will be more readily valued, and so the transaction will be valued based on the crypto’s value at the time of the transaction.
Barter transactions related to crypto would include trading one type of crypto for another type of crypto, and using crypto to purchase goods or services.
The Canada Revenue Agency (“CRA”) generally considers crypto mining a business activity, unless it can be proven that it is simply a “hobby”. If a taxpayer undertakes crypto mining in any significant manner and with an expectation of profit, it is likely a business activity.
Where a taxpayer is in the business of crypto mining and receives crypto as a result of their mining activities, the taxpayer is required to report the value of the crypto as business income when received.
The value of the crypto when received should be determined under the barter transaction rules as discussed above. These rules dictate that the amount of income is equal to the value of the services rendered or the value of the commodity received, whichever is more readily valued. In most cases the CRA appears to consider that the value of the crypto is more available.
A subsequent sale of crypto would be a separately taxable event unrelated to the actual mining process. At this time, the taxpayer would recognize additional business income if the crypto had increased in value from the time it was initially mined.
Crypto as inventory – valuation
If crypto is received on account of income, it becomes a business inventory. There are numerous methods to valuing crypto as inventory, including:
- Each inventory item valued at lower of cost and fair market value at year-end;
- Entire inventory valued at fair market value at year-end;
- If carrying on an adventure in the nature of trade, valued at cost.
Crypto and GST/HST
The current guidance on the application of GST/HST to crypto is incomplete and rapidly changing.
As it stands, receipt of crypto as payment for a taxable good or service by a GST/HST registrant is subject to collection of GST/HST based on the fair market value of the crypto at the time of receipt.
There is a proposed amendment to the Excise Tax Act which would see crypto included under the definition of “financial instruments”. This could exempt the exchange or usage of crypto from GST/HST but could result in consequences for some businesses, including:
- Businesses could inadvertently be deemed financial institutions;
- Businesses could be limited on claiming GST ITCs on related expenditures.
Crypto mining is not currently addressed by GST/HST guidance.
Specified foreign property
Canada has complex rules related to reporting investments in “specified foreign property”. Crypto could be considered specified foreign property if it is held outside of Canada and not used or held exclusively in the course of carrying on a business.
Financial penalties for not reporting appropriately under the specified foreign property rules in Canada can be severe.
It is conceivable that a taxpayer could have one group of crypto assets that are considered inventory, with transations related to the pool being on account of income, and a separate pool of crypto considered capital assets, with related transactions being on account of capital.
The tax rules related to crypto have been evolving rapidly over the last number of years as crypto becomes more popular and transactions increase in complexity. Taxpayers should consult with a knowledgeable tax professional prior to undertaking reporting of crypto transactions.
References for additional reading:
- Tax Interpretations 2014-0525191E5 and 2018-0776661I7
- CRA – Guide for cryptocurrency users and tax professionals
- IT-473R, “Inventory Valuation”
- Tax interpretation 2014-0561061E5
Written by: Chris Brien, CPA, CA