This article intends to provide a small insight into the world of Cryptocurrency and taxation in Canada.
Characterization Of Cryptocurrency
The CRA characterizes cryptocurrency as a commodity.
The use of cryptocurrency to exchange goods or services results in the acquisition or disposition of property or in an income or expense.
The receipt of cryptocurrency in payment for goods or services constitutes income and attracts sales and income taxes based on the fair value of the exchange.
Trading In Cryptocurrency
A taxpayer must determine if he is a trader or an investor.
Gains and losses from “Business” trading are treated as regular income/losses.
When property is held for long term growth, any gain or loss should be treated as capital gains or losses.
Losses incurred as a result of a theft or some sort of embezzlement, are deductible as a business loss or a capital loss depending on the nature of your activities.
However, you must be able to prove your loss. Due to the nature of the asset, this might prove to be a very difficult exercise. A loss would be determined in reference to the actual monetary value of the cost of the commodity that was lost.
T1135 – Specified Foreign Property
Taxpayers must determine where their investments are actually held.
Cryptocurrency is considered by the CRA to be funds or intangible property and when held outside of Canada is subject to the “specified Foreign Property” rules. Foreign accounts or interests in partnerships, trusts, or corporations are all covered by these rules.
Failure to timely file form T1135 brings significant late filing penalties.
Mining in Canada is usually considered to be a business and therefore subject to all the “Doing Business in Canada” rules. If the mining is not done in Canada, all the regular business income reporting rules apply. You cannot escape.
Cryptocurrency Is Anonymous Until!
A coin exchange offers certain anonymity as the cryptocurrency is held in a virtual wallet. This anonymity may work until you want “Real” money. At that point, you are unmasked.
Canada And The IRS
This year the IRS has formed a team of specialists to investigate cryptocurrency-related crimes, including international money laundering and tax evasion. In November 2017, after a yearlong lawsuit, the IRS won a judgment that forced Coinbase, the largest American—based cryptocurrency exchange, to turn over account records for more than 14,000 customers. In January 2018, Coinbase sent 1099-K forms to a number of its current users, informing them that their trading records were being reported to the IRS and reminding them to pay the taxes they owed.
With increased vigilance by the IRS and with the understanding that the IRS and Canada can exchange information, taxpayers should not feel secure about their anonymity.
Exchange Of One Cryptocurrency For Another
From an income tax perspective, this scenario is a barter transaction. Each side of the transaction is characterized as a disposition of property, and each disposition is taxable on the basis of income or a capital gain using the fair market value of the cryptocurrency at the time of the transaction.
Cryptocurrency And RRSP, RIF, RESP or TFSA
There is no way to legally hold cryptocurrency in a “Registered Account”. There are exchange traded funds that can be acquired for this purpose. Investors must be mindful that such funds are new and have no track record and therefore could lack “liquidity”.
Cryptocurrency And Taxation Is Not An Easy Matter
Taxpayers should consult their professional advisors if there are doubts and be reminded that it is against the law to not report all of your income. Trading in cryptocurrencies is a taxable event.
DISCLAIMER: Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing a tax planning arrangement or taking an uncertain tax filing, position. Litwin CPA Inc. cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.
Article written by Michael Litwin, CPA, CA, TEP on August 23, 2018.