Whether you have bitcoins or another digital currency, in Canada, cryptocurrency is considered to be an asset or property, not currency.
Cryptocurrency is increasingly being used for purchasing goods and services and for speculation or longer-term investment purposes.
Despite the many rumours that cryptocurrency transactions are not taxable, the Canada Revenue Agency (CRA) has been very clear on this matter and there is every reason to believe that it will be actively targeting such transactions in the coming years.
Cryptocurrency taxation according to the CRA
The CRA’s first official pronouncement on bitcoins was on December 23, 2013 and stated that the CRA does not consider digital currency as money issued by a central bank or country, such as the U.S. dollar for example. In the CRA’s opinion, cryptocurrency should be considered property for purposes of the Income Tax Act (ITA).
When goods or services are exchanged for merchandise (cryptocurrency), the value of the goods or services must be included in income. Depending on the nature of the transaction, taxpayers who dispose of cryptocurrency in exchange for goods or services may have to tax themselves on the appreciation in value of the cryptocurrency.
For example, a taxpayer who purchased a bitcoin for $1 and subsequently exchanged it for accounting services valued at $100 will have to self-assess tax on a gain of $99.
Similarly, an individual who transacts cryptocurrency and speculates on its value will have to pay tax depending on the nature of the transaction (i.e., business income or capital gain).
Determining the nature of transactions is important as this will have a direct impact on income taxes. The full amount of a gain on a “business income” type transaction will be taxed, whereas only 50% of the gain on a “capital” type transaction is taxed.
Similar measures apply in the case of a loss. The full amount of a loss on a “business income” type transaction can be applied against any type of income (e.g., employment income). On the other hand, only one half of a “capital” loss may be deducted, and it may only be applied against a capital gain.
Cryptocurrency is an asset
Like the United States, Australia and the Netherlands, the CRA has decided to consider cryptocurrency an asset or property rather than currency. Other countries, like Germany and Singapore have decided to consider it a currency like any other.
The CRA might decide to become more flexible in the future to adapt to new market realities. However, there is no indication that this could happen any time soon.
Why should I tax myself? The CRA won’t know…
The Canadian tax regime is based on the principle of self-assessment. As a tax resident of Canada, you are legally required to determine your amount of tax payable and to file an income tax return.
In our work as cryptocurrency tax specialists, we regularly come across individuals and businesses that don’t believe the CRA could be interested in them and prefer not to self-assess on that income. We believe that the opposite is true since the facts show without a doubt that the CRA is very interested in this new technology.
We strongly recommend that you report your cryptocurrency; otherwise, you could find yourself in the CRA’S crosshairs. Additionally, the CRA can go back as far as possible in the case of a voluntary failure to report income.
Our experts at Raymond Chabot Grant Thornton and Catallaxy are available to answer your questions and help you choose the best options.
This article was written in collaboration with Marc-Antoine Laurin.