The Taxation of Cryptocurrency
For the past decade, the rise of Bitcoin and other cryptocurrencies has taken Canadians by storm. However, through the lens of legal policy making, cryptocurrencies are still considered a relatively new phenomenon. That said, Canadian policy makers have recently taken a stronger stance in the regulation and monitoring of crypto purchases. This blog post seeks to summarize the general rules surrounding crypto currencies as well as the main changes Canadians should be aware of.
What are Crypto Currencies?
Generally, the Canada Revenue Agency (“CRA”) considers crypto currencies to be a taxable form of commodity equivalent to stocks and investments. It follows that any gains or losses arising from a taxpayer’s purchase and subsequent disposition of Crypto will be subject to tax.
Irrespective of whether the disposition is from crypto to fiat or coin to coin, the disposition constitutes a taxable event.
Capital Gains vs. Business Income?
Typically, the sale of cryptocurrencies would be categorized as a capital gain and result in only 50% of the gross capital gain being taxable. On the same “token”, this means that only 50% of any losses derived from the sale of crypto currencies would be considered a taxable capital loss. Furthermore, capital losses are “quarantined”, in that it can only be applied to offset capital gains and not other sources of income (such as from business nor employment).
However, in some circumstances, the CRA may determine that this trading activity constitutes income on account of business. When this happens, the proceeds of disposition arising from the transaction is captured in full (100%) and taxed accordingly. This usually occurs when the CRA determines that the taxpayer is actively trading crypto currencies or is in the business of speculating price changes of crypto currencies.
Other factors the CRA considers when determining if the taxpayer’s profit in selling crypto is capital or business income includes but not limited to:
- The intention of the Taxpayer;
- The length of time the crypto currency is held;
- The frequency in which the taxpayer buys/sells crypto currencies; and
- The taxpayer’s knowledge and expertise .
It is important to note that each case is very fact-dependent on the taxpayer, their trading activity and other material circumstances.
How do I Calculate my Gains and Losses?
Taxpayers must also be very attentive of the constantly changing adjusting cost base (“ACB”) of their crypto currencies. In short, ACB is the measure of what the taxpayer paid to receive the coins. Naturally, the ACB is subject to change then if the taxpayer purchases and sells their coins throughout the year at different prices.
The following example clarifies this concept. Suppose the following transactions occurred:
- Taxpayer purchased 1 coin of X for $100 on January 1st;
- Taxpayer purchased an additional 1 coin of X for $200 on May 1st;
- Taxpayer sold 1.5 coins of X for $300 on June 1st; and
- Taxpayer purchased an additional 1 coin of X for $400 on August 1st.
In this example, the Taxpayer’s ACB after transaction 1 would be $100. However, after transaction 2, the taxpayer’s ACB for coin X would increase to $150. As a result, the taxpayer’s proceeds from the disposition in transaction 3 would be $150 ($300 – $150). After transaction 4, the taxpayer’s ACB of coin X would rise to $275. This example assumes there are not transaction fees for each purchase and sale.
Taxpayer’s should also be aware that the ACB of each type of coin should be calculated and monitored. For instance, the cost basis of Bitcoin, Ethereum, Litecoin and others must be calculated separately and adjusted after each corresponding transaction. Intuitively, this is akin to calculating the ACB for different stocks. The ACB of a taxpayer’s Apple shares should not be affected by a subsequent purchase or sale of RBC shares or any other stock except Apple.
If you have questions about the taxation of crypto currencies, call us today! We are here to 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 this article. If you have specific legal questions you should consult a lawyer.