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This taxation year was the first time we saw a lot of cryptocurrency (crypto) transactions, so we thought it might be interesting to share some tax information about it.
So, What is Crypto?
Crypto is a digital currency designed to be used over the internet. The encryption technology blockchain typically supports crypto. In addition, blockchain maintains secured transaction records of who bought, sold, or traded crypto. You can obtain crypto in many ways, & new methods are being developed all the time. Like any currency, you can use crypto to buy goods, pay bills, or invest.
Investing in Crypto
You can buy crypto through an exchange & hold it in a digital wallet. Your digital wallet holds your private keys, securing your crypto while allowing you to send, receive & spend it. Lose your wallet & you lose access to your crypto.
If you’re looking to invest there are many options to choose from. Unlike 2009 when Bitcoin was your only choice, now there are nearly 20,000 different cryptocurrencies. Also, each type of cryptocurrency has its own value which changes with supply & demand. Like all investments, crypto is volatile. As of June 13, 2022, the total value was $970 million, whereas the record high value was $2.9 trillion.
Is Crypto Taxed?
Crypto assets are not taxed however, profits from crypto disposition are.
What is Crypto Disposition?
Disposition is how you get rid of something, such as giving, selling, or transferring it. In the case of crypto, there could be tax consequences if you:
– sell or make a gift of crypto
– trade or exchange crypto, including disposing of one crypto to get another
– convert crypto to government-issued currency, such as Canadian dollars
– use crypto to buy goods or services
Do I Report My Profit as Capital Gain or Income?
You claim capital gains from crypto sales if your crypto activity is not business related. As a bonus, only half of the gain is taxable. Furthermore, any capital loss gotten from crypto sales can be offset by capital gains in the year they are sold or the prior 3 years. However, if you do not have any capital gains in that period, you can carry forward the losses to a year when you have gains. Be aware, you cannot use the losses to reduce income from other sources, such as your employment income.
The Canada Revenue Agency (CRA) may consider the following as crypto businesses, crypto:
– exchanges, including ATMs
In addition, if there is not an obvious business, they look for the following signs of business activity”, where you:
– carry on activity for commercial reasons & in a commercially viable way,
– undertake activities in a businesslike manner
– prepare a business plan & gain capital assets or inventory
– promote a product or service
– show you intend to make a profit, even if you are unlikely to do so in the short term
Because activities like crypto mining can also be a hobby, the CRA looks at all crypto activity on a case by case basis. Therefore, it is so important that you keep all your records of activity, equipment purchases, etc.
To file your income tax return, you need to know how to value your cryptocurrencies. This depends on whether they are capital property or inventory. When cryptocurrencies are held as capital property, you must record & track the adjusted cost base so that you can accurately report any capital gains.
If your crypto is inventory, there are two methods to value it. Once you choose a method you must use it consistently every year. The acceptable methods are to value:
– each item in the inventory at its acquired cost or its fair market value at the year end, whichever is lower
– the entire inventory at its fair market value at the year end
Whether you obtain or dispose of crypto, or accept it as payment in your business, you must keep records of all transactions. These records are needed to complete your tax return. Be mindful, you are required to keep all crypto transaction records & supporting documents for six years from the end of the last tax year they relate to.
The transaction record information you need to keep includes the:
– date of the transactions
– crypto purchase or transfer receipts
– crypto value in Canadian dollars at the time of the transaction
– digital wallet records & crypto addresses
– transaction description & the other party information (even if it is just their crypto address)
– exchange records
– accounting & legal costs
– software costs related to managing your tax affairs.
Crypto miners must also keep the following records:
– crypto mining hardware purchase receipts
– expense receipts
– mining operation records such mining pool fees, hardware specifications & maintenance costs, etc.
– mining pool details & records
This is the high level introduction to crypto & what is needed for taxes. Our tax specialist dug deep this year learning the ins & outs of crypto! Contact us if you have questions & they’ll help you out!