With the explosive growth of digital currencies like Bitcoin taking center stage in many of the most popular financial stories over the last year, we felt it was time to shed a little light on what it means for those of you trading and investing in cryptocurrencies come tax time.
The extreme volatility and massive growth in Bitcoin’s value has made it very attractive to some people looking for the next dot.com or get-rich-quick opportunity, but don’t think digital currency is exempt from CRA’s reach. Despite the relative anonymity of digital currencies, you are still required to report all income and gains involving cryptocurrencies to the CRA. Here are 5 of the most common questions to consider:
If cryptocurrency is anonymous, why should I report it?
Although cryptocurrency is generally considered anonymous, the reality is that they are what’s known as ‘pseudonymous’, meaning that it is not tied to an actual person, but rather to a specific set of keys. This means that the Bitcoin holder is not identifiable, but all transactions are publicly available.
Cryptocurrency Exchanges are usually required by law to collect a certain level of personal information from anyone registering as a user. In Canada, there is still no law in place that forces exchanges to reveal the identity of the holder, but at some point you will eventually cash out or purchase something with your digital currency, and that is when your transactions can be tracked.
What about purchases made with cryptocurrency?
Purchases made with any form of cryptocurrency are viewed the same as a bartering transaction in the eyes of the CRA. That means that any product or service you may exchange your bitcoin for can be subject to GST/HST, and you may also have a requirement to collect GST/HST on the digital currency you traded. Additionally, if you trade your cryptocurrency for a good or service at a higher value than you paid for the cryptocurrency, a gain is realized and income tax must be paid on this profit.
How should I report the sale of my Bitcoin?
If you cashed out on any of your cryptocurrencies last year, you are required to report any of your profits or losses to the CRA in the same manner you would report any investment in property (similar to stocks), meaning treating your profits or losses as business income or capital gains, depending on your specific situation.
What about trading one cryptocurrency for another?
An exchange of cryptocurrencies is viewed as a barter transaction for the purpose of taxation. The exchange is considered as a disposition of property, and each currency is assessed at their respective fair market value at the time of the transaction. Similar to a sale, the exchange can be treated as either business income or capital gains, depending on your specific situation.
What about the process of “mining” cryptocurrency?
If you have set up an operation to contribute to the “mining” or processing of Bitcoin transactions, or have invested in a company who is involved in these transactions, you are most likely being rewarded with Bitcoin or one of the many other cryptocurrencies, and these rewards need to be declared as income. You should also note that any losses or expenses incurred during this process can be claimed as deductions against the income being generated.
Final thoughts
As cryptocurrency is a relatively new concept, the laws around taxation are continuously being revised. The best approach right now is to talk to an accountant or lawyer knowledgeable in the study of cryptocurrency for your best advice on handling your specific taxation matters.