Yes. Digital currencies, including cryptocurrencies, are subject to taxation under ordinary income tax rules. Gains and losses from buying and selling cryptocurrencies must be reported as part of income when filing a tax return. Since cryptocurrencies are not government-issued currency, they are treated by the Canada Revenue Agency (“CRA”) as a commodity.

Depending on the extent of the trading activities, the transactions may be characterized as being on account of income or capital. Generally, if an individual is in the business of trading cryptocurrency, any gains or losses will be treated as being on account of income. If an individual is not engaged in the business of trading cryptocurrency, any gains or losses will be treated as being on account of capital.

Using cryptocurrency to pay for goods or services is viewed as a barter transaction and is subject to the barter rules of the Income Tax Act. The monetary value or equivalent of the cryptocurrency is counted as the amount of the payment, or receipt, and the transaction is reportable for tax purposes.

Trading cryptocurrency for another type of cryptocurrency

Generally, when you trade one type of cryptocurrency for another type of cryptocurrency, CRA believes that the barter transactions rules will apply to that transaction. For example, if a taxpayer converted Bitcoin to Ethereum, CRA would consider this a disposition for tax purposes. This disposition for tax purposes must be reported on your income tax return as either business income (or loss) or a capital gain (or loss) depending on your specific circumstances.

How much tax will I pay on my cryptocurrency?

If transactions are characterized as being on account of income, the net income will be taxed at an individual’s marginal income tax rate. If transactions are characterized as being on account of capital, 50% of the realized capital gains will be taxed at an individual’s marginal rate.

If I gift my cryptocurrency, am I liable to tax?

When any item is donated or gifted for a value different than its acquisition cost, CRA will treat the donation or gift as a disposition of property. Accordingly, this applies to a gift or donation of cryptocurrency. The cryptocurrency will be valued at fair market value at the time of donation, and any capital gain or loss from the disposition must be reported. If the gift is made to a qualified donee (such as a registered charity), it may be possible to receive a tax receipt from that donee. The amount of the gift for tax purposes will be determined by the fair market value of the cryptocurrency at the time of the transfer.

How will CRA know about my profits?

Not reporting income from cryptocurrency transactions is illegal. In order to ensure a fair tax system, the CRA actively pursues non-compliance with respect to reporting income from cryptocurrency trading. Cryptocurrency exchanges increasingly require personal information in order to set up an account. CRA may be able to access this information and verify it with other sources to identify individuals who seek to avoid paying taxes on transactions.

What if I have made a loss?

Individuals in the business of trading cryptocurrency can deduct losses when computing income from a business. Losses that occur as a result of theft are likely deductible if they can be considered an inherent risk in carrying on the business and if the loss is reasonably incidental to the normal income-earning activities of the business.

How is cryptocurrency mining treated by the CRA?

Mining cryptocurrency involves solving complex computer problems in exchange for an award of cryptocurrency. This type of computer problem requires high processing power, often resulting in high electricity costs. The CRA has suggested personal mining may be treated as a non-taxable hobby or personal activity, whereas mining for commercial or business purposes should be reported as income. The electricity costs reasonably attributable to the cryptocurrency business may be deducted as business income.

What if I fail to declare any taxable profits?

It may be possible to correct a declaration made to CRA by pursuing a voluntary disclosure or by filing an amended return. Consult a licensed professional in order to ensure that these steps are taken appropriately and without risk of further penalty.

For further information, or assistance with tax planning, please contact a TEP.