Cryptocurrency Taxation Guide
Written By: Hasman Dhaliwal
Cryptocurrency, also known as digital or virtual currency, has become increasingly accepted and legitimized as a form of investment and a means of transaction. However, the tax implications of engaging with cryptocurrency can be confusing for both individuals and businesses.
In Canada, we look to the Canada Revenue Agency (CRA) for guidance on the tax treatment of cryptocurrency uses, whether transactional or otherwise.
Despite the CRA’s acknowledgement that cryptocurrency can be used as a medium of exchange, it's important to note that the CRA considers cryptocurrency to be a commodity, not a currency. Accordingly, any transactions involving cryptocurrency are subject to the same tax laws as transactions involving other forms of property, such as stocks or real estate.
Taxable events around the use of cryptocurrency can be confusing. Accordingly, we breakdown the most common uses of cryptocurrency and highlight potential taxable events that occur in relation to the same. Those are: buying and holding cryptocurrency, disposing of cryptocurrency, and earning cryptocurrency by way of mining or in exchange for services.
Buying and holding cryptocurrency as an investment
If cryptocurrency is bought to hold as an investment, there is no taxable event which occurs. However, in the event this cryptocurrency is sold, any potential gains on the value of the same will be taxed as capital gains. As such, it is important to record each purchase transaction to determine your purchase price on the same.
Disposition of cryptocurrency, selling on an exchange, trading it, gifting it or otherwise
In the event of disposition, you should always assume there is a taxable event which has occurred. For clarity, disposition includes any event in which you transfer away ownership of your cryptocurrency. This includes the sale of cryptocurrency (for cash or another cryptocurrency), trading the cryptocurrency for a good or service, or gifting it.
When it comes to such an event, any resulting capital gain or loss must be reported on an individual's income tax return. A capital gain is realized when an individual sells their cryptocurrency for a higher price than what they originally paid for it, while a capital loss is realized when an individual sells their cryptocurrency for a lower price. The CRA considers each transaction separately, so it's important to keep detailed records of all buy and sell transactions.
For businesses, transactions involving cryptocurrency may also have sales tax implications. The GST/HST may apply to the sale of cryptocurrency, depending on the specific circumstances of the transaction. Businesses that accept cryptocurrency as payment for goods or services are also required to record the transaction in Canadian dollars.
Mining cryptocurrency or being paid for work in cryptocurrency
Mining cryptocurrency is unique from purchasing the same, as (for proof-of-work mining) the individual or business is expending electricity in exchange for newly minted coins. Accordingly, mining cryptocurrency is typically considered a commercial activity and any resulting income is subject to income tax rather than capital gains. This means that miners may be eligible to claim certain expenses, such as electricity costs, as deductions against their income. The same situation applies to those who earn cryptocurrency in exchange for services or work, as this is considered income and is taxable as the same.
Disclaimer
The above is not to be considered tax advice, and rather general guidance surrounding taxable events in relation to the use of cryptocurrency. The tax laws surrounding cryptocurrency in Canada can be complex, and it's important to consult with legal and tax experts to ensure compliance with all relevant laws and regulations.
About the writer:
Hasman Dhaliwal is a lawyer with SB LLP, South Edmonton’s premier law firm conveniently located at 209, 2920 Calgary Trail NW, Edmonton, AB, T6J 2G8.
Hasman, who works primarily as a commercial and corporate lawyer, advises cryptocurrency clients across Canada.
To learn more about Hasman, please visit our website: https://sb-llp.com/hasman-dhaliwal