Dear Clients and Friends,
Given the recent rise in the use of cryptocurrencies, the Canada Revenue Agency (CRA) has implemented guidelines on the taxation of transactions involving cryptocurrencies. This helps ensure Canadians are aware of their tax obligations that result.
What are the tax implications of disposing of cryptocurrencies?
In general, possessing or holding a cryptocurrency is not taxable. However, there could be tax consequences when you have any of the following types of dispositions of cryptocurrency:
- sell or make a gift of cryptocurrency
- trade or exchange cryptocurrency, including disposing of one cryptocurrency for another
- convert cryptocurrency to government-issued currency, such as Canadian dollars
- use cryptocurrency to buy goods or services
What income is generated when disposing of cryptocurrencies?
The income you get from disposing of cryptocurrency may be considered business income or a capital gain. Most investors prefer capital gains treatment as only 50% of the income generated is subject to tax. Generally, if you are in the business of actively trading cryptocurrencies, the disposition would generate business income. Alternatively, if you are holding cryptocurrencies as a long-term investment, the disposition would normally generate a capital gain. If you are unsure how to classify income from your transactions, Clearhouse LLP can help determine this for you as it is a bit of a grey area.
Trading Cryptocurrencies: When you dispose of one type of cryptocurrency to acquire another cryptocurrency (ex. trade Bitcoin for Ethereum), the barter transaction rules apply. This transaction is considered a disposition, and you must report either business income or a capital gain on your income tax return.
How are cryptocurrencies valued?
Valuing your cryptocurrencies depends on whether they are considered capital property or inventory. Clearhouse LLP can help determine this classification.
What types of books and records should you maintain?
If you acquire or dispose of cryptocurrency, the following should be kept for at least six years:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction (buy and sell)
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party (even if it is just their cryptocurrency address)
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs
How does the GST/HST apply to cryptocurrency?
For HST registrants and non-registrants who meet the $30,000 threshold, HST will apply when a taxable good or service is exchanged for cryptocurrency. The GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the transaction. Please ensure you keep all records that show how you calculated the fair market value.
What are the foreign property tax implications associated with owning cryptocurrencies?
Entitlement to your cryptocurrency exists in the form of a digital ledger on the related blockchain, but because it’s stored on a blockchain, it can simultaneously exist in several geographic locations.
Hot wallets are digital wallets connected to the internet, which is how nearly all cryptocurrency exchanges or online providers store your cryptocurrency. Cold wallets are not connected to the internet and are typically on a physical storage drive.
The geographic location of a cold wallet is wherever the physical drive, computer or USB key with the private key on it is located. If the cold wallet is in Canada, then the associated crypto holdings associated with it are unlikely to be subject to the T1135 foreign property reporting requirements.
On the other hand, when a hot wallet is used, “the primary server location used by the wallet provider should be strongly determinative of situs. If the server is located outside Canada, the associated holdings are more likely to be subject to foreign property reporting requirements.
Canadian resident taxpayers must file Form T1135 with CRA if the total cost of all of their specified foreign property (including cryptocurrency) is more than $100,000 and a failure to do so could result in a tax assessment with significant penalties being issued to the taxpayer by CRA.
What is specified foreign property?
Specified foreign property does not include “property that is used or held exclusively in the course of carrying on an active business of the person or partnership”. Those who mine and/or trade in cryptocurrency, depending on their trading activities and other surrounding factors, may be determined to be mining and/or trading as an active business. For these cryptocurrency holders, who conduct active business, their crypto holdings used as part of that business are exempt from the T1135 reporting requirement.
Please do not hesitate to contact us at info@clearhouse.ca or (647) 969 7382 if you have any questions.
Kindest Regards,
Your Clearhouse LLP Team