What is cryptocurrency?
Cryptocurrency is decentralized digital money, based on blockchain technology. It is a form of currency that can be exchanged online for goods and services. However, it is not legal tender in Canada as it operates independently of any central bank, central authority or government.
The Currency Act defines legal tender as only:
- Bank notes issued by the Bank of Canada under the Bank of Canada Act
- Coins issued under the Royal Canadian Mint Act
How does the CRA Approach Cryptocurrency?
The CRA's position is that cryptocurrency should be treated as akin to a commodity for the purposes of the Income Tax Act. As a result, crypto transactions are subject to the same rules as barter transactions – transactions where one commodity is exchanged for another. Any income from transactions involving cryptocurrency can be treated as business income/losses or as a capital gain/loss, depending on the taxpayer's circumstances.
When is cryptocurrency taxed?
Canadians typically do not pay any taxes to hold a cryptocurrency but doing any of the following can lead to tax liability:
- Gifting cryptocurrency
- Selling cryptocurrency
- Exchanging or trading cryptocurrency, including converting between cryptocurrencies
- Converting from cryptocurrency to CAD or another fiat currency
- Buying goods or services with cryptocurrency
Do you need to declare your income from cryptocurrency transactions to CRA?
Yes. Income or gains from trading in digital currencies are subject to tax under the income tax rules. Gains and losses from buying and selling cryptocurrencies must be reported in a taxpayer's income when filing a tax return. Depending on the extent of the trading activities, the transactions may be characterizable as being on account of income or capital.
Generally, if an individual is in the business of trading cryptocurrency, or is engaged in an "adventure or concern in the nature of trade" any gains or losses ought to be reported as being on account of income. If an individual is not engaged in the business of trading cryptocurrency, gains or losses can be reported as being on account of capital.
The case law provides guidance to CRA auditors who typically use the following factors to categorize cryptocurrency as business income:
- Volume of trades – the more a taxpayer trades in a given year may indicate an "active" business
- A product or service is promoted
- The overall behaviour is managed in a commercially viable way
- Activities are done "in a business-like manner" (such as acquiring inventory or capital assets or making a business plan)
The net income will be fully included in income and taxed at the individual's marginal income tax rate. CRA considers cryptocurrency mining, trading, exchanges, and ATMs to all be cryptocurrency businesses.
- Adventure or Concern in the Nature of Trade
The CRA may also consider transactions to be an adventure or concern in the nature of trade, which would also result in a full income inclusion for the taxpayer, even if only a single transaction is undertaken. The relevant factors to consider are:
- whether the taxpayer dealt with the property in the manner consistent with how a dealer in said property would ordinarily deal with it
- whether the nature of the property itself precludes the possibility that its sale was a realization of an investment or of a capital nature
- whether the taxpayer's intention as deduced is consistent with a trading intention
Of the above factors, generally, the courts have held that the taxpayer's intention is the most important and usually is determinative. The result is the same as business income, meaning that the taxpayer will be required to include 100% of the net gain into income.
- Capital Gains:
Generally, a transaction will be considered on account of capital based on some of the following factors:
- The property was purchased to generate recurring income such as rent or dividends
- Evidence of an intention to hold long term
- There is an absence of evidence of business intention or behaviour related to the asset
When characterized as a capital gain, only 50% of the net gain will be included in the taxpayer's income for the year and will be taxed at the individual's marginal rate.
Reporting Ownership of Cryptocurrency to CRA
Because cryptocurrencies are treated in a similar manner to any other type of asset, Canadians who hold bitcoin or other cryptos with an aggregate cost base greater than $100,000 on exchanges or physical wallets outside of Canada will need to report their holdings on the T1135 – Foreign Income Verification Statement which must be filed each year with the income tax return if applicable. Failure to do so results in a strict liability penalty of up to $2,500 per year, and there is the potential for additional Gross-Negligence Penalties in excess of $10,000 per year to be assessed.
What if you fail to declare your (taxable) profits?
Failure to report income from cryptocurrency transactions, or failure to declare cryptocurrency held offshore is illegal in Canada and can result in prosecution for a criminal offence under the Income Tax Act, the imposition of extremely punitive Gross-Negligence Penalties and more. Depending on your circumstances, however, it may be possible to correct the deficiency with CRA by proactively filing a Voluntary Disclosure Application. Late-filing or amending can be considered but will result in penalties, so seeking specific legal advice in advance is preferred.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.