Cryptocurrency (or crypto) has become increasingly popular in recent years, with more Canadians investing in digital currencies like Bitcoin, Ethereum, and others. Nevertheless, with this popularity comes a range of complex legal and tax-related questions. One of the most common questions that crypto investors and traders in Canada face is whether the profits from their crypto transactions should be reported as capital gains or business income.
How Does the Canada Revenue Agency Define Cryptocurrency?
First and foremost, in any legal or tax-related question, it is advisable to search and understand the definition of the term as defined by the appropriate authority. This way, when reading an income tax folio or an interpretation bulletin from the Canada Revenue Agency ("CRA"), all specific terms are defined and locating the appropriate rules and explanations is more accurately achieved.
Notably, however, for the term "cryptocurrency", the CRA merely provided reference information for the public to simply understand the term, rather than assigning a specific definition to be strictly followed. Also importantly, crypto-assets such as cryptocurrencies are not necessarily securities for income tax purposes. What this means is that there is much open to interpretation, and an accounting or legal expert may be best suited to interpret a client's tax filing needs and concerns.
The CRA understands cryptocurrencies to be "crypto-assets that are designed to function as a medium of exchange. They can be used to buy products or services, traded for other currencies, or acquired for speculative purposes. Unlike traditional currencies, cryptocurrencies are not controlled by centralized entities such as central banks."
Crypto-asset "can generally be described as a digital representation of value that relies on a cryptographically secured distributed ledger, or a similar technology, to validate and secure transactions. Common examples of crypto-assets include, but are not limited to:
- cryptocurrencies (payment/exchange tokens);
- utility tokens;
- security tokens; and
- non-fungible tokens (NFTs)."
Understanding Capital Gains vs. Business Income
Before diving into the specifics of cryptocurrency transactions, it is important to understand the basic difference between capital gains and business income.
- Capital Gains: These are profits you earn when you sell an asset, such as property or stocks, for more than what you paid for it. In Canada, you only pay tax on 50% of your capital gains. This is typically applicable to investments you buy and hold with the intention of selling them for profit later.
- Business Income: This refers to profits earned from an active business activity. In the context of crypto, if you are regularly buying and selling cryptocurrency as part of a business operation, then the profits from these activities are considered business income, and you may be taxed differently than on capital gains.
So, What Is the Difference in the Context of Crypto in Canada?
For crypto in Canada, the difference between capital gains and business income often comes down to yourintentionand yourcourse of conduct, such as how frequently you are buying and selling cryptocurrencies.
- Capital Gains: If you buy cryptocurrency as an investment and hold onto it for a long time before selling, you are likely dealing with capital gains. This situation is similar to someone buying stocks or real estate with the goal of holding onto it for future appreciation. The CRA tends to view this as an investment activity, and any profits from these sales would likely be considered capital gains.
- Business Income: If you are frequently buying and selling cryptocurrencies, or if you are using crypto for more active purposes (like mining or trading as part of your business), then the CRA might consider this to be business activity. In this case, any profits would be considered business income, and you would be subject to regular income tax rates, which could be higher than capital gains tax rates (i.e. 100% of business income is taxable).
How Does the CRA Decide?
The CRA does not have a one-size-fits-all answer, and determining whether your crypto activity falls under capital gains or business income depends on the facts and circumstances of your case. The CRA looks at factors such as:
- Frequency of Transactions: If you are buying and selling crypto often, it is more likely to be considered business income. For example, if you are trading crypto daily or weekly, the CRA may view this as a business activity.
- Intention and Period of Ownership: Did you buy the cryptocurrency with the intent to hold it as an investment, or were you planning to sell it quickly for a profit? If your primary goal is long-term investment, it may lean toward capital gains. But if you are buying and selling for quick profits, it may be considered business income.
- Expertise and time spent: If you have specialized knowledge or skills related to cryptocurrency, such as being a professional crypto trader and/or much of your time is spent studying the market and investigating potential purchases, it could be more likely considered business income.
- Regularity and Organization: If you are carrying out your crypto transactions in a structured and organized way, similar to how a business operates, this could also indicate that your activity is more business-oriented.
- Advertising: If you advertised or otherwise made it known that you are willing to purchase cryptocurrencies, then your course of conduct could be considered business income as well.
The above list is not exhaustive, and the CRA could factor in other things as well, such as financing for the crypto transaction(s) and more.
What Should You Do?
As a crypto investor in Canada, it is crucial to properly report your crypto activities on your taxes. The CRA expects you to keep records of all transactions, including dates, amounts, and the value of crypto in Canadian dollars at the time of the transaction.
If You Are a Casual Investor: If you are buying and holding crypto as a long-term investment, it is likely you will report your profits as capital gains. Remember, you only pay tax on 50% of the capital gains, which can be a more tax-friendly approach than reporting business income.
If You Are an Active Trader or Miner: If you are actively trading or mining crypto, then it is more likely that you will need to report your earnings as business income. This means you will be subject to regular income tax rates.
Consult a Tax Professional: Since the CRA looks at each situation individually, it is always a good idea to consult a tax professional who can help you determine whether your crypto transactions should be classified as capital gains or business income.
Conclusion
The key takeaway here is that whether your crypto profits are considered capital gains or business income depends largely on how you engage with crypto. If you are holding your cryptocurrency as an investment for the long term, capital gains likely apply. If you are buying and selling frequently or treating your crypto activity as a business, then business income may be the appropriate classification.
Remember, the CRA has specific guidelines for different types of transactions, so make sure you report your earnings correctly to avoid any issues down the line. Again, with cryptocurrencies, the CRA guidelines are not as clear-cut, and every person's dealing with cryptocurrencies may vary.
If you are unsure about how to handle your taxes, it is always best to consult with a tax expert familiar with cryptocurrency laws.
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.
