Authors: Kimberly Burns, Mahdi Shams
It’s tax season, and the Canadian Revenue Agency (CRA) has published various forms of guidance on the tax treatment of cryptocurrencies for traders, investors, businesses and merchants.
In Canada, cryptocurrency is considered a commodity, not currency, and will be taxed to investors as capital property, resulting in a capital gain or loss on a transaction determined based on cost base and sale price. The Internal Revenue Service (IRS) established the same position in IRS Notice 2014-21, and is approaching cryptocurrency as intangible personal property, not legal tender.
What does that mean for a taxpayer in Canada?
Taxpayers using cryptocurrency as an investment will have to track gains and losses on cryptocurrency transactions as they would on other capital property, and report these annually on their income tax return. If the taxpayer is engaged in the business of trading, the gain or loss would be on account of income rather than capital gains – this is only a consideration for taxpayers in the business of trading or investing, not taxpayers holding a cryptocurrency as an investment. CRA’s Interpretation Bulletin IT-479R, Transactions in Securities, provides information that can help in determining whether transactions are income or capital in nature.
Taxpayers using cryptocurrency to buy and sell goods will also need to calculate gains and losses. If a bitcoin in a taxpayer’s wallet has increased in value, and that bitcoin is spent to purchase a pizza, then the taxpayer reports the capital gain as of the date the bitcoin was spent. The pizza vendor tracks the fair market value of the bitcoin received as business income, and if the pizza vendor then holds the bitcoin, it may also have a capital gain in the case of a future sale. The CRA’s position on barter transactions, like using bitcoin to purchase goods, is described in Interpretation Bulletin IT-490, Barter Transactions.
There are also tax consequences for those mining cryptocurrencies. If a taxpayer’s business is mining, then any coins mined are business income and should be reported. If a taxpayer mines as a hobby, then gains are not taxable as income, but the resulting coin is a capital asset, and capital gains or losses will have to be tracked and reported if the coins are later sold.
The tax treatment could be challenging for a Canadian taxpayer that has a mining hobby, uses cryptocurrencies to purchase goods, and also holds long term investments in coins. Cryptocurrency startup Coinbase has created a tool for U.S. users of cryptocurrency on the Coinbase platform that will help track capital gains or losses for the IRS, and this is a helpful step in the right direction for industry participants in the U.S. However, there is no Canadian equivalent right now. As long as the CRA considers cryptocurrencies commodities, not currencies, active users in Canada will have to invest time in tracking their use and investment each year in order to report to the CRA at tax time.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.