CRA position on income tax implications of cryptocurrency transactions
We live in a digital age—information is transferred and transactions are completed at a speed never thought possible. Amazing innovations have taken place in the last decade. One is the creation of digital currency, or cryptocurrency, the best-known of which is Bitcoin. While it sometimes seems that tax authorities play catch-up to technology’s latest advances, not much escapes the scrutiny of the Canada Revenue Agency (CRA).
Cryptocurrencies have moved into the mainstream. In the digital economy, people are not only increasingly transacting with and trading cryptocurrency, but they are actually “mining” it. This ever-growing frequency of cryptocurrency transactions—along with the consistent volatility in the value of crypto—has left many who have traded, earned or transacted using cryptocurrency wondering how to treat it for tax purposes.
The CRA has issued general guidance about the taxation of transactions carried out using cryptocurrency. While the CRA acknowledges that cryptocurrencies are a digital asset that can be used to buy and sell goods or services over the internet, they are not recognised as legal tender in Canada. As a result, the rules governing barter transactions will apply where cryptocurrency is used to purchase or sell goods or services. In addition, the CRA maintains that cryptocurrency should be treated like a commodity when bought, sold, exchanged (including when disposed of in exchange for another cryptocurrency) or transferred from one person to another.
Using cryptocurrency to buy or sell goods or services
The CRA takes the position that where cryptocurrency is used to pay for goods or services from a vendor or service provider carrying on a business, that vendor or service provider supplied a taxable good or service. However, unlike a similar transaction carried out using traditional currency, a transaction using cryptocurrency is subject to the barter rules for income tax purposes. When cryptocurrency is used to buy or sell goods or services, it will be necessary to put a Canadian dollar value on the business transaction for tax purposes. Once a value has been established, the vendor or service provider will then be considered to have received that dollar value for the sale of the good or the service rendered.
Consider the example of a car mechanic who accepts payment in cryptocurrency for a routine maintenance check. For tax purposes, the mechanic is considered to have received a payment equal to the value of the service provided. This value will generally be the same amount as would have been charged to a customer paying for the same service in Canadian dollars. It follows that this value will be included in the mechanic’s income for tax purposes.
The same principle applies where goods are exchanged for cryptocurrency. The Canadian dollar value of those goods will similarly be brought into the taxpayer’s income where the transaction is business related. For example, if a consumer electronics store accepts cryptocurrency in exchange for a computer, the retail value of that computer in Canadian dollars will be included in the store’s income for tax purposes.
Where a taxpayer uses cryptocurrency to purchase goods or services for their business, the CRA’s guidance on barter transactions appears to suggest that the value of the cryptocurrency used to purchase services or the goods in Canadian dollars would become the amount the taxpayer must use to record their costs or expenses for tax purposes. In the early days of cryptocurrency, determining the value of the cryptocurrency being exchanged for goods or services at a point in time would have likely been difficult. In such a case, the value of the good or service being exchanged would have been used to assign a price to the transaction for tax purposes. However, with the technology currently available, it is now much easier to quickly and accurately determine the Canadian dollar equivalent of most cryptocurrencies. As such, it is generally more practical for the taxpayer using cryptocurrency to purchase goods or services to value the transaction based on the fair market value of the cryptocurrency given as consideration.
According to the CRA, where a taxable property or service is exchanged for cryptocurrency, the goods and services tax/harmonised services tax that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange. (To learn more about the indirect tax consequences arising from the acquisition and use of cryptocurrency, see the CRA’s Position on Cryptocurrency: GST/HST Implications.)
Cryptocurrency can also be bought, sold or exchanged. In this regard, the CRA has specifically stated that cryptocurrency is to be treated as a commodity for income tax purposes and any resulting gains or losses arising from the trading of cryptocurrency will be taxable in the same manner as any other commodity. Whether such gains or losses are taxable as income or capital will depend on the facts surrounding the transactions. Like transactions involving other types of commodities, the tax consequences of realizing any resulting gains or losses would be determined by considering a variety of factors, including the intention of the taxpayer, as well as the nature and frequency of the transactions. Other factors to consider could include:
- The period of ownership;
- The taxpayer’s expertise and knowledge of cryptocurrencies;
- The relationship, if any, between the cryptocurrency transactions and the taxpayer’s ordinary business;
- The time spent engaged in cryptocurrency activities;
- The type of financing that is required to support the taxpayer’s cryptocurrency activities; and
- Whether the taxpayer has advertised or otherwise made it known that they are engaged in this activity.
In most cases, the courts and the CRA have relied on a combination of these factors when determining whether a taxpayer’s activities are on account of income. For instance, a taxpayer who actively and regularly speculates in cryptocurrency, such as a day trader, may be more likely to be taxed on income account. By comparison, a taxpayer who buys cryptocurrency infrequently with the intention of holding it as an investment may be more likely to have these transactions taxed as capital in nature.
Finally, the CRA takes the position that the foreign reporting requirements extend to cryptocurrencies that are situated, deposited or held outside of Canada. This means that Canadian taxpayers who hold cryptocurrency outside of Canada with a value that exceeds CAD 100,000 at any time during the year, either directly or indirectly through funds, that is not used or held exclusively while carrying an active business, will have an obligation to file Form T1135 to report the property.
Earning cryptocurrencies through mining
Mining cryptocurrency involves using specialised computers to solve increasingly complex mathematical problems to create a valid “block.” Once a miner successfully creates a valid block that is accepted by the corresponding cryptocurrency’s network, they will receive two payments: one for the creation of new cryptocurrency and the other as a fee for successfully validating the block. These payments are made in the cryptocurrency that they are validating. There may be some uncertainty as to whether transactions arising from the mining of cryptocurrency are on account of income or capital. Like cryptocurrency trading, the income tax implications of cryptocurrency mining will differ depending on whether these activities would be considered business or personal income. This determination would be made on a case-by-case basis.
Where a taxpayer mines cryptocurrency in a commercial and business-like manner, the value of the cryptocurrency coins mined would be included in the miner’s income for tax purposes. Since cryptocurrency mining can be a complex undertaking that generally involves the use of highly specialised and powerful computer equipment, it is likely that the miner is incurring large costs to purchase both the equipment and the electricity needed to run it. The consequence of taking the position that cryptocurrency mining is a business activity would be that any outlays to purchase computing equipment or expenses incurred for electricity could likely be claimed to reduce the net amount of mining income included in taxable income.
It may be possible that in some circumstances the mining of cryptocurrency could be treated as a hobby or a personal endeavour and not subject to income tax. Be aware that the CRA cautions taxpayers that if a hobby is pursued in a “sufficiently commercial and businesslike way,” it may be considered a business activity and taxed accordingly.
Maintaining books and records
Adequate books and records should be maintained by those who transact with, trade or mine cryptocurrency to ensure compliance and proper recording of transactions for tax purposes. In addition, taxpayers who accept cryptocurrency for goods or services, or who pay for goods and services in cryptocurrency, should ensure that they have established a system for recording such transactions within the books and records of their business.
To ensure that cryptocurrency transactions are documented properly, the CRA's general guidance states that the following information/records should be maintained:
- Date of the transactions;
- Receipts of purchase or transfer of cryptocurrency;
- Value of the cryptocurrency in Canadian dollars at the time of the transaction;
- Digital wallet records and cryptocurrency addresses;
- Description of the transaction and the other party (even if it is just their cryptocurrency address);
- Exchange records;
- Accounting and legal costs; and
- Software costs related to managing these transactions.
In addition, those who mine cryptocurrency should keep the following records in support of their cryptocurrency transactions:
- Receipts for the purchase of cryptocurrency mining hardware;
- Receipts to support expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs and hardware operating time); and
- Mining pool details and records.
Tax implications of being paid salary in cryptocurrency
In cases where an employee has been paid in cryptocurrency, the fair market value of the cryptocurrency at the time it was received must be included in the taxpayer's income for the relevant tax year. From the employer's perspective, if the employer elects to pay its employees in cryptocurrency, it is responsible for withholding and remitting an appropriate amount of source deductions to the Receiver General in respect of employment income.
With our increased reliance on transacting within the digital economy, it is not unreasonable to believe that you, or your business, may encounter transactions carried out in cryptocurrency. While some uncertainty does exist, there is no doubt that the CRA considers transactions involving cryptocurrency to be taxable events for Canadian income tax purposes.