Taxation of Cryptocurrencies

Taxation of Cryptocurrencies

Early this year cryptocurrencies, such as bitcoin and ethereum, have blown up. Along with them, the question of taxation has also blown up. If you are not familiar with cryptocurrencies, go ahead and google the term before reading further. For simplicity, I’ll refer to bitcoin in this article, although the same principles generally apply to all such “currencies.” Although such “currencies” are not recognized in Canada as currencies like the Canadian dollar, there is no question that they are recognized as assets, and when earned or “mined,” they are recognized as income, although the form of income for tax could vary depending on the facts. The general rule for taxation in Canada is that a Canadian resident is subject to taxation on his or her world-wide income, from all sources. This is far reaching and covers the cyberspace of Internet. So you can expect some form of taxation with respect to your bitcoins, which may be an understatement.

Although the Canadian government does not recognize bitcoin as a currency, they do consider the market when measuring its value. Generally, measurement is done using fair market value, which is determined based on the amount that an independent / objective and arm’s length person would be willing to pay for it. With an open trading market for bitcoins, the fair market value at a point in time is usually easily available. The relevant values are converted into Canadian dollars for the purposes of taxation, so the timing is relevant and could affect the tax. The exchange of bitcoins falls under the barter rules of the Canadian tax system, which uses market values for measurement.

The mining and trading of bitcoins may or may not be considered as a business trade, or it could fall under the rules for capital transactions. If the nature of one’s involvement deems the activity to be an adventure in the nature of trade, then it would be considered a business activity. The Canadian Income Tax Act (and other relevant tax legislation) have defined business. The determination is made by looking at various factors, such as the time commitment, level of knowledge, frequency of transactions, among other factors. Should your bitcoin trading be considered a business, your gains would generally be considered business income and would be included in your income as such. You can generally deduct business expenses that are incurred for the purposes of earning this income.

If your trading is of a capital nature (i.e., it is not a business or hobby / personal activity), then your gains and losses would generally be considered capital gains and losses, respectively, for tax purposes. Only one-half of capital gains (at the current rates) are included in income, meaning you effectively pay half of the tax on capital gains as you pay on other income at the same tax bracket. If you have losses, then they can only be deducted against other capital gains, not against any other type of income. For example, if you lose money in bitcoins and earned income only from a business or employment during the same year, then you will not save any tax as a result of those losses; however, you will be able to offset those losses against future capital gains. For individuals, it is generally preferable to consider gains as capital as the tax rate is half of the regular rate. On the other hand, an individual would prefer to treat losses as business losses, as such losses can be offset against other income to reduce tax. The correct treatment is, of course, based on the facts, not preferences.

Sales taxes such as GST and HST may also be relevant when it comes to bitcoins. This point often comes as a surprise to those who think they are trading currencies. Specifically, if you are mining or trading bitcoins as a business then you may be required to charge the sales tax when you make a trade. As mentioned earlier, bitcoin is recognized under Canadian taxation as an asset. Specifically, it is considered a commodity. The sale of this commodity could be a taxable sale for GST/HST purposes, just like sale of any other merchandise.

This article is meant to provide you with general information to give you a taste of this subject matter. Although existing taxation rules and principles are applicable to cryptocurrencies, the subject matter can be complicated. In no way can this subject be thoroughly covered off in a short article. To anyone dealing in cryptocurrencies, we strongly suggest you obtain professional tax advice. This may prove beneficial in proactive planning and enable you to make decisions that serve to optimize your tax position and minimize your taxes owing.

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Attaul Hamid



The contents of this article are written and published to provide general information and are not intended to substitute advice. As individual circumstances, which may be applicable in a specific situation, have not been addressed in this article, readers seeking specific advice may find the information misleading. Such readers are encouraged to consult a professional to obtain complete and relevant advice related to their situation. We have made every effort to prepare the information with care. However, we do not accept responsibility for its use and any outcome arising out of its use. Where opinions are expressed, such opinions do not reflect the facts of the subject matter and should not be considered as advice or recommendation(s).