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Crypto Tax: What taxes must be paid on cryptocurrency transactions under the ITA?

Jan 19, 2022

Cryptocurrency tax laws and guidance develop at a much slower pace than the technology that gives rise to the issue. Much uncertainty remains, but to the degree possible, Blue J helps clarify tax obligations arising from cryptocurrency transactions. Not sure how to report gain from transactions involving bitcoin or other crypto? In this blog post, we cover how to distinguish between income from transactions undertaken as a hobby or in the course of a business, while also distinguishing between different kinds of activities, such as crypto trading, mining and staking, and receiving cryptocurrency as payment for goods or services.

Distinguishing business activities from hobbies

When individual taxpayers decide to take a shot at mining cryptocurrency, or when they dabble in cryptocurrency trading as part of their investment efforts, taxpayers may inadvertently engage in business activities, which leads to different tax treatment of any gains and losses resulting from such activity as the taxpayer may have intended or foreseen. When undertaken as a business, the gain from a transaction will be treated as taxable business income. When the gain or loss results from a hobby, the gains or losses will be treated as capital gain or losses with 50 percent of the gains being taxable and the losses being deductible against any capital gains. As a first step, it must therefore be determined whether the cryptocurrency transaction took place as a commercial or a private endeavour (a hobby).1 Note that in either case the acquisition and the holding of cryptocurrencies are not taxable events and neither is the movement of cryptocurrency between the taxpayer’s own wallets or accounts.

Income from commercial activity

Getting paid in cryptocurrency

When a business is providing services or selling goods, payment for which is received in the form of cryptocurrency, the CRA considers this to be a barter transaction, that is, an exchange of commodities. Consequently, the value of the goods or services provided must be brought into the taxpayer’s business income if they are business-related. The amount that must be included in the taxpayer’s income is the fair market value of the goods or services. Note that some bartered goods may instead give rise to a capital gain even though they are bartered as part of commercial activity. This will be the case for capital property, such as a valuable painting, a boat or land that is bartered for cryptocurrency. 2

Determining the value of the transaction falls upon the taxpayer. In the cryptocurrency context, a reasonable method to determine the value of the transaction would be to choose an exchange rate taken from the exchange broker used to facilitate the transaction, or an average of midday values across a number of high-volume exchange brokers. The chosen valuation method should be used consistently. However, different cryptocurrencies must be valued separately. 3

Trading cryptocurrency

If a taxpayer is holding or trading cryptocurrency as a business, it is considered inventory and any gain realized on the cryptocurrency will be fully taxed as business income. Inventory must be valued at the end of every year. 4

Cryptocurrency trading involves several steps to be taken by the taxpayer, not everyone of which gives rise to tax consequences. 5

Mining/staking cryptocurrency

Both mining and staking result in the generation of newly minted tokens. The CRA does not differentiate between original cryptocurrency and cryptocurrency that has been received as part of a barter transaction between two parties. The CRA takes the position that a miner who is in the business of mining receives the cryptocurrency in exchange for a service, the validation of a new block. Consequently, the miner is engaged in a barter transaction when she receives cryptocurrency in exchange for her services. 6

The value of the cryptocurrency in Canadian dollars must be included in the miner’s income at the time it is received. On the point of valuing the income amount, the CRA states: “In most cases, the CRA expects the value of the Bitcoin received to be more readily valued and, accordingly, this is the amount to be brought into income.” 7

Blue J has assembled the ITA provisions that play a role in determining the tax treatment of cryptocurrency transactions as well as the (sparse) available guidance by the CRA to date. We address not only the question of whether cryptocurrency income is business income or capital gain in the case of mining/staking, chain splits, employment income etc. but also the CRA’s position that cryptocurrency is considered “specified foreign property” and “offshore investment fund property”.

Footnotes

4 In CRA Interpretation Bulletin IT-473R Inventory Valuation [Archived] the CRA provides guidance on how to undertake an inventory valuation.
Marc R. Arnould & Brad Kirby, “Taxation of Cryptocurrency & Tokens: Simple, Yet Not So Simple, Taxation (Part 1)”, Taxes & Wealth Management, Thomson Reuters, Issue 11-2, June 6, 2018 sets out the tax implications for Canadian residents during every step of a generic non-registered cryptocurrency or token trade life cycle, starting from the transfer of Canadian dollar to a digital wallet over the various steps involved in trading in cryptocurrencies to the withdrawal of Canadian dollars from the exchange wallet.
7  ibid.