Cryptocurrencies are taxable commodities in Canada, according to the Canadian Revenue Agency (CRA). However, it does not mean that the total value of your cryptocurrency is taxed every year. The CRA is currently concerned with taxing businesses and individuals who earn regular income from cryptocurrencies.
When filling taxes this year, you must consider if your cryptocurrency holdings fall under any of the above categories. You must also decide; is this a business income, or is it capital gains? To do that, you need to know what the difference between income and capital gains is. Exactly how a person uses their assets will determine if they are business income or capital gains.
The disposition of your cryptocurrency assets will determine how they are taxed. The disposition of an asset is understood as the way you sell or off-load your assets. Actions that include disposition are selling, trading, and transferring or gifting their ownership. Lastly, all sources of cryptocurrency income must be converted into Canadian dollars to be assessed correctly. The value of any cryptocurrency in CAD is determined using Fair Market Value.
Business Activity To Report On Your Taxes
- Those mining cryptocurrency
- Those who trade regularly
- Businesses that operate as exchanges
- Businesses where cryptocurrency is a method of payment
- Businesses that have cryptocurrency ATMs
- If filing income as capital gains or losses, use Schedule 3: Capital Gains (or Losses).
- If filing as business income, report income under T2125 Statement of Business or Professional Activities.
Any business that operates as a cryptocurrency exchange in Canada is a business and must report income. It also means that a Canadian crypto exchange must be legally registered to sell securities in Canada. Cryptocurrency is not legal tender. However, regulations established in April 2021 mean that digital currencies are treated the same way as traditional securities are.
All activity that intends to raise a profit is considered businesslike activity. A business is separate from a hobby. If you irregularly trade cryptocurrency, that may be considered a hobby. But if the activity occurs with regularity, it is a business. If you trade cryptocurrencies regularly throughout the year, you are probably operating a business with profits and losses. Regular cryptocurrency trading is essentially treated the same as traditional day-trading assets, which is a business operation.
Likewise, if your business accepts payment in the form of cryptocurrency, this is also taxable. Even if your business also accepts other forms of payment, such as CAD or cash, the exchange of goods and services for cryptocurrency is business income. Another factor is if your business accepts cryptocurrency for goods or services. If it does, the payments made with digital currencies are treated as barter transactions. Digital currencies are not legal tender. Barter transactions are when there is an exchange of goods or services without legal currency. In this case, you must consider the CRA regulations for barter transactions.
As an aside, GST and HST must be applied to sales made with cryptocurrencies.
Treat the profit or loss of income from the sale of any of your cryptocurrencies as capital gains. Capital gains are different from business income and must be reported as such. You do not need to operate a business to pay capital gains. Capital gains occur whenever a person sells valuable assets.
Taxable capital gains are determined based on the original price and then compared to the disposition price. For example, if you buy a cottage for $400,000 and sell it for $600,000, the difference of $200,000, less any expenses. Only 50% of the gains are taxable. In this case, the tax is on the earnings of $100,000.
Next, add that $100,000 of taxable income to any other income in that same tax year. That means that all sources of annual income determine the total income you are taxed on. The same is true of capital losses as well, except that it works to reduce your taxable income instead of increasing it. And for all digital assets and capital gains or losses.
To prove how you use your cryptocurrency, you must keep detailed records of all of your transactions. The CRA recommends that your documents should include:
A detailed record of all transactions. That includes dates, times, addresses of the other party, and the digital wallet the transaction was made from. Records should also include all exchanges between cryptocurrency and fiat currency, such as CAD or USD.
Any expenses for your business, including any legal or accounting fees, and all other business-related expenses, must be kept. Because cryptocurrencies may be business income, this also means that expenses may be tax-deductible.
The fair market value of the cryptocurrency in CAD at the time of the transaction. Keeping a record of the value at the time of purchase is very important. Because cryptocurrency is volatile, if you do not have records to prove the value of the digital currency at the time of the transaction, this could lead to inaccurate value estimations.
Report the value of your cryptocurrencies and digital currencies in Canadian dollars. The valuation of all cryptocurrencies is determined using fair market value. Fair market value is determined to be the highest price that a knowledgeable buyer is willing to pay for the asset at the time of the valuation. To determine fair market value, you can use the values given by a Canadian cryptocurrency exchange you use. Whatever the method of value is, use the same method consistently for accuracy.
And finally, each cryptocurrency needs to be individually evaluated. If you own more than one kind of digital currency, each asset needs to be independently valued.