4 Things Canadian Crypto Investors Need To Know For Tax Season
By Daniel Zunenshine
2017 was marked by numerous historical events, but one of them stands out in particular: the rise of cryptocurrency. Bitcoin, an anonymously founded digital currency, primarily discussed on the margins of mainstream media by techies, suddenly shot up without warning, followed by a seemingly endless stream of “altcoins”. These alternative digital currencies — notably Ethereum, Litecoin and Ripple — started attracting attention after increases in trading volume in the cryptocurrency market in the latter months of 2017.
As an asset with no intrinsic value, Bitcoin became highly controversial. Public opinion was divided between those who believed in its worth and others who chalked it up to another looming bubble, to join the historically famous cases of the 17th century Tulip-mania and the Dotcom bubble of the 90s. Whether cryptos are here to stay or just a passing fad, only time will tell.
As the new year begins, so does tax season, meaning taxpayers — particularly those who are new to crypto investing — should learn how to report the gains, losses and other tax consequences which may have come about in their investing adventures.
The following is a quick primer based for those who trade in cryptocurrencies (CCs), on tax applicable issues for Canadian taxpayers.
#1 - Any one can trade CCs as they would any commodity
Any one can trade CCs as they would any commodity and if any gains or losses are made, they must be reported, with 50 percent being taxable (or deductible in case of losses). This would be the case if Bitcoins were sold for Canadian dollars or traded for Ethereum and a gain or loss resulted. If the CCs are just held and not sold, no gains or losses are realized, thus creating no obligation for reporting.
#2 - Cryptocurrency transactions are considered on a case by case basis
Whether a cryptocurrency transaction is categorized as a capital or income transaction is questionable, and should be considered on a case by case basis by an accountant. For example, if a taxpayer was to buy and sell Bitcoin with the intention of holding it long-term to realize a gain - without it being related to his/her business - that could be considered a capital transaction. However, it may be considered an income transaction if he/she were buying and selling Bitcoin on a daily basis, for instance. The main issue here is that, under Canadian tax law, business income is fully taxable whereas only 50 percent of capital gains are. In making this determination, factors to be considered would include: frequency of transactions, period of ownership, knowledge, relationship between the transaction and the taxpayer’s business, time spent and financing.
#3 - A business transaction involving CCs will have the same tax implications as a barter transaction.
Practically speaking, if Bitcoins were received as income or spent on an expense in a business, the fair market value in Canadian dollars of the item or service for which they were traded must be reported in full on the tax return, whether they are received as income by an individual, partnership or corporation.
#4 - Mining CCs can be considered a business
Depending on intention, mining CCs can be considered a business, for which deductible expenses can be claimed, or a personal hobby. The mined Bitcoins may be considered as inventory if used in a business, in which case they would be valued at the cost at which they were produced (mainly consisting of electricity costs).
Seeing as the cryptocurrency market is a relatively new concept, there is not much documentation available pertaining to its tax and legal implications. Given this, it would be best to consult an accountant or tax lawyer to discuss cryptocurrency-related matters.