This Blog was written by: Dave Madan, Market Lead and Manager, Scotiatrust
We’re well into tax season, but for this year, your review of your taxable transactions may be very different. You might have explored investing or trading cryptocurrency. Buying and selling some Dogecoin after Elon’s tweets does carry income tax implications. Everyone exploring this new age of investment should understand the implications, as well as their advisors looking to impart some advice to the new era of investors.
The market is massive today, currently, the market cap of the combined cryptocurrency market is $1.8 Trillion USD. Let’s put that in perspective, Canada’s total GDP for 2021 was $1.67 Trillion USD. The market is growing fast, 1 in 4 Canadians are holding cryptocurrency assets, most only having entered the market in the past year. We need to be paying more attention to this market.
Let’s start with defining the asset in the view of the CRA. Cryptocurrency is not legal tender, at least not in Canada. While some other countries have already taken the position that it is, Canada is not there, at least not yet. It is a digital asset, referred to as “crypto,” or “token,” and in some cases, “altcoin” – if referring to a lesser known, or less mainstream version. It works as a medium of exchange between parties for goods or services. Strong encryption techniques control the custody of the assets, and also verify transactions, in most cases, publicly. Most cryptocurrencies are independently managed, with no central authority.
Relating this back to the Income Tax Act, the CRA considers cryptocurrency a commodity. Income generated from the buying and selling is considered capital gains. Depending on the activity, income can also be considered as business income.
Book values need to be maintained, and tracked, similar to keeping track of your securities. The price someone is willing to pay for the particular asset is its value for the day. If you hold more than one type of cryptocurrency, such as Bitcoin and Ethereum, both need to be valued separately.
CRA clarifies the reporting as either income or capital gain as, if the buying is for the purposes to trade, it can be considered business activity, and will need to be reported as business income. When trading between currencies, each sale is a deemed disposition, and needs to be valued in Canadian dollars, even if not being settled back to Canadian dollars. Short answer – if you are buying to HODL, you can expect to report as capital gains.
For some, participating cryptocurrency market is the activity of mining for cryptocurrency. Miners contribute to a cryptocurrency network, devoting computing power to continue building the network, by processing blocks of transactions, or some other activity that furthers the legitimacy of the network. As a reward, the miner receives a payment. The payment represents the creation of new cryptocurrency. Depending on the scale of the activity, CRA will either consider this as a hobby, or a business. If you are a miner and have any substantial effort in mining beyond as a hobby, it would be wise to consult with an income tax professional.
Did you know GST/HST also applies to your cryptocurrency transactions? If a business is accepting cryptocurrency as payment, tax is calculated based on the fair market value of the transaction at the time.
Let’s also address NFTs. Non-Fungible Tokens exist on a cryptocurrency’s blockchain as a verification of ownership of an asset. Think of a deed to a property. It’s not the property itself, but the verification that you own it. These themselves would be considered a derivative of a cryptocurrency asset, that hold their own value, expressed in terms of the cryptocurrency. Transactions into NFTs are also considered taxable transactions at the time they are sold, and again, can be determined as business income or capital gains. If there is a royalty component where future transactions of the NFT generate income back to the originator, this income is taxable as business income.
And of course, there is also a deemed disposition on death. The executor of the estate holding cryptocurrency will need to determine its cost base, and market value.
Some best practices of recordkeeping if you are someone who holds or trades cryptocurrency:
- Dates of transactions
- Receipts of purchases or transfers
- Value in Canadian dollars at the time of transactions
- Digital wallet addresses (and securely stored keys)
- Description of transaction
- Exchange records
- Accounting and legal costs
If you are also a miner, some additional records to consider:
- Receipts for mining hardware and maintenance
- Receipts of expenses supporting mining activity (power bills, mining pool and exchange fees)
- Mining pool details
All of this information should be safely stored. While the transactional information is not sensitive, where you store the backup information to any wallets, either cloud wallets or even cold wallets, is very important, and should be stored in a safe place, where your executor is also aware of it’s location.
There are a few apps that and websites that help you organize this information, and will also assist you in your tax reporting. One of the most efficient and easy to use tools that is also CRA friendly is Koinly.
Filing taxes on cryptocurrency will be a new activity for many this year, and it would be prudent to find a professional to guide you. This is also a great opportunity for advisors to differentiate themselves in the market, and get familiar with cryptocurrency. With an accelerating market value, the market is growing fast, and will easily leave those unfamiliar behind.