The taxation of cryptocurrency has been a subject of much misinformation. Make no mistake, the CRA will get their piece of the crypto-pie. If you have purchased, or will be purchasing cryptocurrency, this document will provide you with a basis to cover your liabilities for tax.
1. Get a hold of your data
The first thing you need to know is that you must save all of your transaction history. You will likely be interacting with exchanges such as Binance, Quadriga, Shakepay, or Coinbase. These exchanges keep records on all of your trades.
Find the trade history on your exchanges website, download the transactions from the relevant time frame, and keep copies for yourself. Your accountant will need these exports from these exchanges in order to calculate your tax liabilities, just like trading information from a stock brokerage.
If the only cryptocurrency transactions you make are trading transactions on exchanges (fiat-to-crypto, or crypto-to-crypto), this is most likely the only data you’ll need to provide a crypto-savvy tax preparer. But, other situations require a bit more diligence that we’ll explain below.
2. Initial Coin Offerings (ICO)
When buying tokens from an ICO, the information you’ll need for tax purposes will not be included in your trade history. You’ll need to keep your own record of the date, and the price and amount of the token used to make the purchase. Your purchase price (cost) of these new tokens will be equal to the value of the token used to participate in the ICO.
For example, you spend 10 ETH to purchase 1,000 XYZ coin, and ETH was trading at $500 CAD. You are deemed to have sold those 10 ETH for $5000 CAD, and this is a taxable event (either gain or loss depending on what price you purchased that ETH). The cost base for your XYZ tokens is now $5,000, and will be used to calculate gains or losses when these new tokens are traded or spent.
3. Using crypto as (gasp!) currency
If you’re using your crypto to actually buy and sell things, you will need to record these transactions as well. These are ‘barter’ transactions. The deemed price at which you ‘sold’ that cryptocurrency is the value of the item purchased.
For example, if you purchase a laptop for 3 ETH, and the fair market value of the laptop $1,000 CAD, you are deemed to have bartered that 3 ETH for that amount. For tax purposes, the proceeds of disposition of your 3 ETH is $1,000 CAD.
If you were the seller in this scenario, you now have 3 ETH, and the deemed cost to you is $1,000. Selling those 3 ETH on an exchange will now result in a capital gain or loss, and $1,000 will be used as your cost base.
If you were buying or selling goods in the course of business, you need to consider sales tax implications as well. If you provide GST taxable services, are a registrant and accept Bitcoin, you still must remit GST based on the value of those services as if it were a cash transaction. And, if you purchased those services as a business, you can still claim an input tax credit at that cash value, (and expense the services, of course.)
4. Common misconceptions
Exchanging one cryptocurrency for another, even when no fiat currency is withdrawn, is a taxable transaction. Think of cryptocurrencies as commodities. If you traded gold for silver, and profited from the change in the price of gold, this is a taxable capital gain. Crypto is no different.
Each transaction is taxable, except the purchase of cryptocurrency using after-tax fiat currency. You can buy as much crypto as you want on Coinbase, and there is no taxable transaction until you trade or sell.
5. Capital Gains Vs Business Income
Whether your cryptocurrency activity will be treated as capital gains or business income for tax purposes is an important distinction your accountant can help with.
Generally, most people’s activity with cryptocurrency will be taxed as capital gains. The CRA considers many factors, including:
Other sources of income:
Is your full time job trading cryptocurrency? This would be considered business income.
Does your job have nothing to with trading securities and commodities? This is more of a hobby, and your intention is to treat crypto as capital.
Do you have thousands of trades per year? This indicates significant effort, and will likely be treated as business income.
Business income is taxed at 100% of your personal tax rate, whereas capital gains are taxed at 50% of your personal tax rate. This creates a bias; wanting to treat losses as business losses, and gains as capital gains to reduce tax. If you are unsure, your accountant can help make an unbiased determination.
We encourage people who would be taxed as business income to incorporate. This allows for tax planning with your income and tax-deferral. Check out our post on the tax-planning opportunities during the recent bear-market.
7. Metrics can help!
We are leading cryptocurrency taxation professionals in Canada. We work with corporate crypto companies as well as individuals, and have often received referrals for crypto-tax work from the ‘Big 4’ accounting firms. We can quote you an estimated cost based on our hourly rates, and the complexity and number of transactions you made in the year. Let’s chat. Get Metrics.