Cryptocurrency Mining and the CRA
This tax season brings many hot topics, however one that carries a high degree of complexity is the taxation of cryptocurrency. As the cryptocurrency market rebounds, and Bitcoin surges towards $12,000-mark, Taxpayer’s should be weary of how they report their income, what counts as income, and what must be reported.
Specifically, a looming question is, does a taxpayer who mines cryptocurrency include the value of “mined” currency in income at the time it is received? For more information on cryptocurrencies and the CRA in general, please see our prior blog post on cryptocurrencies and the CRA.
Cryptocurrency Mining and the CRA
Cryptocurrencies are entirely decentralized and therefore exist separate from a central bank. With this decentralization comes a notoriety of security, and in modern times they are often used as a method of payment for goods and services. However, unlike traditional currency cryptocurrency must be mined.
The mining of these cryptocurrencies is a very complex and digitally demanding matter. It requires the use highly specialized computers which must solve intricate mathematical problems. Upon the solution of these problems, the cryptocurrency transactions are complete, and the digital version of a currency is mined. Miners then group cryptocurrency transactions into blocks and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrency’s network and becomes part of a public ledger, known as a blockchain. By mining, a miner is monitoring and validating transactions occurring on the network.
Successful miners will receive two types of payments. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Both types of payments should be disclosed on the taxpayer’s returns.
Cryptocurrency Mining and the CRA – How is it Taxed?
Ultimately for taxation purposes, if you perform the mining processes, you are paid with the cryptocurrency you are validating. In the CRA’s view, this is a barter transaction.
A barter transaction occurs when two parties agree to exchange goods or services and carry out that exchange without using legal tender. Cryptocurrencies are not legal tender, therefore, when a cryptocurrency is used to pay for, or is received as payment for, goods or services, this is treated as a barter transaction. Thus, if you or your corporation are in the business of mining cryptocurrency, the currency received must be included as income at the time it is earned under section 3 and section 9 of the Income Tax Act.
As a result, taxpayers who receive cryptocurrency as proceeds from their mining activities, must bring into income the value of the services rendered or the value of the cryptocurrency received. The value to be included depends on whichever is more readily valued. In most cases, this should be the value of the cryptocurrency received and this is the amount to be brought into income.
If you have ever been involved with mining of cryptocurrencies or cryptocurrency transactions in general, and are being audited by the CRA or have questions, contact our office today. As well, if you believe you have not properly disclosed this income on your tax returns in the past, the Voluntary Disclosures Program may be available to correct your past errors or omissions. Call us today, we can help!
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.