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The Bitcoin and crypto frenzy has returned. Many new-age investors are looking at crypto as an investment asset. But there are debates over its sustainability as many regulators do not consider Bitcoin or other cryptocurrencies like Litecoin, Dogecoin, or Ethereum as a legal currency. Canada is taking a step closer to accepting Bitcoin and even introduced Bitcoin ETFs. The Canada Revenue Agency (CRA) is also cracking down on the crypto gains for taxes.
The CRA is scrutinizing the crypto gains. As per a court ruling, crypto exchange Coinsquare will divulge details of customers whose accounts had $20,000 or more on December 31, 2020, in the years 2014 through 2020. The agency may likely use the directive for other crypto exchanges as well.
It’s time you take Bitcoin taxation seriously before the CRA lays its tax claws on you and imposes a fine that could go up to double your tax amount.
Is crypto income taxable?
The Ultimate Guide to Help you Report your Crypto Wealth to the CRA
Crypto is not yet a legal currency in Canada. There is a need for a proper regulatory framework to introduce a digital currency as an official means of exchange. Hence, whatever rules are there around crypto are vague and considered on a case-by-case basis.
The CRA has not introduced any Bitcoin tax, but this doesn’t mean that any gains or losses from crypto are out of the tax purview. You still have to report crypto-related income or gain to the CRA and pay tax on the same.
This is where all the confusion begins. When should you report your crypto income? How should you calculate the crypto income and file it under which segment? This article will answer all your queries step by step.
When should you report your crypto wealth?
The CRA considers cryptocurrencies as commodities for tax purposes. Hence, holding or storing a cryptocurrency does not attract tax. Crypto comes under the CRA tax purview only when you dispose of the currency by selling, transferring, or exchanging it for another good/service, paper, or cryptocurrency.
The crypto income is the dollar amount left after deducting the acquisition price of cryptocurrency with disposal price. There are three ways you can acquire cryptocurrency:
Purchasing it on the crypto exchange
Receiving it as a payment for good or service.
When Bitcoin was new, many miners used it to buy pizza. The pizza houses should read this to know how to report their crypto wealth for tax purposes. You should report your crypto wealth in the year you encashed or used the cryptocurrency.
How to calculate the value of your crypto?
The next step is to calculate the crypto income in dollar terms because the CRA doesn’t accept Bitcoin for tax payments. Unlike the paper currency on which its value is printed ($10 bill will have $10 printed on it), cryptocurrency has no direct value. Its value keeps fluctuating on the crypto exchange. Hence, you must use one method to determine the value of the cryptocurrency and keep a record of it as a supporting document.
For instance, you can determine the value of the cryptocurrency as the exchange rate taken from a single crypto exchange. In this case, export the information of your transactions from the crypto exchange and store it. The document should contain the following details:
the date of transaction
its value in Canadian dollars
description of the transaction (a gift, a purchase, or encashment)
cryptocurrency addresses of the other party, and
accounting and legal costs.
You should also store the receipts of the purchase or transfer of cryptocurrency.
If you don’t like the above valuation method, you can take an average of midday values of the digital currency across several high-volume crypto exchanges.
How will the CRA tax your crypto wealth?
Once you have calculated your crypto wealth in dollar terms, you have to determine under which segment it falls:
Capital gains tax
It is important to report it in the correct segment as they have different tax treatment. The CRA charges capital gain tax only on 50% of your capital gain. And if you had a capital loss, you can only deduct it from capital gain. You can’t use the capital loss to reduce your taxable income. Let’s take two scenarios to understand the taxable income.
Emma purchased Bitcoin for $10,000 in 2015 and disposed it for $35,000 in 2020. She will report 50% of her crypto income of $25,000 ($35,000-$10,000) under capital gain tax. Her taxable capital gain is $12,500.
If Emma is a Bitcoin trader and earns the same crypto income of $25,000, she will report this entire amount under taxable business income.
Is your crypto wealth a business income or a capital gain?
Until now, the entire taxation process was smooth. But here comes the tricky part. There is confusion on whether crypto wealth is a business income or a capital gain? The CRA determines it on a case-by-case basis.
But some cases have a clear answer. If there is a repetitive activity over regular intervals undertaken with the intention to make a profit, it is treated as business income. For instance, a crypto trader who buys and sells cryptocurrency frequently will report the crypto gains/losses in business income.
If there was only a single transaction, it could be a business income or a capital gain. For instance, Emma purchased a high-end graphic card, cooler, and other equipment only to mine cryptocurrency and then sold the crypto for a profit or a loss. This could be considered business income. But if she brought the hardware for gaming or programming and used her free time to mine the currency, it could be considered a capital gain.
If you are using cryptocurrency as an alternative investment, there are other tax-efficient ways to get exposure to the crypto price fluctuation. Instead of holding the Bitcoin, you can invest in The Purpose Bitcoin ETF (BTCC-B) or stocks of crypto mining companies like BitFarms (BITF) through your Tax-Free Savings Account (TFSA). This will save you from all the above hassle and make your Bitcoin-related investment income tax-free.
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