The Canada Revenue Agency (CRA) insists that native residents pay taxes on digital currencies. However, CRA refuses to categorize them as legal tender. Instead, it views it as a kind of commodity under the umbrella of the Income Tax Act. It means that bitcoin circuit enthusiasts must keep track of all their dealings. They must report everything to the CRA. It could do with profits or losses. It could do with purchases or sales.
Crypto Dealings Leading to Taxation
Certain actions are taxable. They include –
- Trading in, or exchanging digital currencies.
- Converting one cryptocurrency into another.
- Converting a digital currency into a fiat currency or CAD.
- Gifting digital currencies.
- Using cryptos to purchase services/goods.
- Selling cryptos.
Considerations for Business Income Taxation
According to the CRA, the trader/investor is liable for business income tax, in the following circumstances.
- There is an intention to promote a service/product.
- The individual is keen to garner profits, whether short-term or long-term.
- Dealings go through in a business-like way. They include planning a project, acquiring inventory, etc.
- The dealings go through for purely commercial reasons and in commercially viable ways.
It is to be noted that the CRA includes taking control of ATMs, mining for digital currencies, running cryptocurrency exchanges, and trading of digital currencies, as business ventures.
Entrepreneurs need not pay taxes, unless they have been in business for a year, at least. The CRA demands at least a year of activities, before taxing a trader/investor.
Considerations for Capital Gain Taxation
According to the CRA, the investor/trader is liable for capital gain taxation, if –
- Sales do not come under the category of business income.
- Sales bring in profits.
It is necessary for Canadian residents to place profits garnered from sales of digital currencies, under the income category. These profits classify as capital gains. Of note, is the fact that only a portion of this ‘income’ amount is taxable, not the total.
In case of capital losses resulting from sales of digital currencies, the capital gains may come into play for offsetting them. However, losses resulting from other sources, are not eligible for the same concession. An example is earning less via employment income.
Then again, if the capital losses are higher than the capital gains, the investor/trader may carry them forward. The time limit for carrying and recarrying is three years.
Use of ACB
It refers to an adjusted cost basis. In other words, it is the average cost that comes into play for calculating capital gains. For instance, what are the costs of an individual’s purchases regarding identical properties?
In simpler language, an investor/trader must work out the lone average for every digital currency. To illustrate, suppose there is a dual purchase of Bitcoin, albeit at different times. Similarly, an Ethereum purchase takes place at three different times.
Then, the individual sells the stock of both cryptocurrencies in the same year. First, there is the average of the two Bitcoin purchases. Then, there is the average of the three Ethereum purchases. The ACB takes both averages into consideration.
Taxation of Specific Digital Currency Transactions
The CRA considers this to be a commercial income. It is because the trader is engaging in purchasing and selling, even if it is for short durations. After all, the aim is to garner profits.
The trader must report only the profits in his/her income tax returns. The losses do not deserve a mention.
Here, the miner is utilizing a computer system to resolve mathematical problems. This way, digital currency transactions receive confirmations.
It is up to the miner’s explanations, whether the CRA views it as a hobby or a business.
Hobbyists must place it under capital gains. Deductions are not permitted. The cost basis is zero.
Businesses must place it under acquiring inventory. It is essential to value the crypto’s fair market value or acquisition cost.
Reasons for Exemption from Taxation
The CRA does not charge the investor/trader for holding cryptocurrencies.
Similarly, there is no taxation for transferring digital currencies from one wallet, cryptocurrency exchange, or account, to another. However, the investor/trader must have records of everything in place. The ACA calculations depend upon what is in the original wallet/exchange/account.
Purchases of cryptocurrencies are not liable for taxation either.