What is cryptocurrency?
Cryptocurrency is a digital asset, that is intended to be used as a medium of exchange for goods and services between the parties who agree to use it. It operates independently of any bank, central authority or government, and strong encryption techniques are used to control how its units are created and to verify transactions. Bitcoin, created in 2009 as an open-source software, is one of the most commonly known currencies.
Trade and barter with cryptocurrency
Any income received or expenses made must be declared for tax purposes, regardless of whether any actual cash was used in the transaction. Since cryptocurrency cannot be declared on your taxes, you must declare the dollar amount that would otherwise have been claimed. For example, if you received payment in bitcoin for dog-walking services, and you usually charge $150 per week for dog-walking services, then you must declare $150 as income on your return — even if you accepted bitcoin.
Disposition of cryptocurrency
While holding a cryptocurrency is not taxable, there could be tax consequences when you dispose of a cryptocurrency – for example, if you sell or make a gift of cryptocurrency, trade or exchange cryptocurrency (including disposing of one cryptocurrency to get another cryptocurrency), convert cryptocurrency to government-issued currency, or use cryptocurrency to buy goods or services.
The income you receive upon any of such dispositions may be considered business income or a capital gain. It may be considered business income if you carry on an activity for commercial reasons or in a businesslike manner, you promote a product or service, or you intend to make a profit. While business activities usually involve some regularity or a repetitive process over time, in some cases, a single transaction can be considered a business – for example when it is an adventure or concern in the nature of trade. Cryptocurrency businesses include, without limitation, cryptocurrency mining, cryptocurrency trading, and cryptocurrency exchanges.
If the sale of a cryptocurrency is for an amount more than the original purchase price, and it is not considered business income, then the taxpayer has realized a capital gain, and half of the capital gain would be subject to tax.
Valuing cryptocurrencies
When filing your tax return, you will need to determine the value of your cryptocurrencies. The method will depend on whether they are capital property or inventory. If they are capital property, you will need to keep track of their adjusted cost base. If they are inventory, while there are different ways to value such inventory, the same method should be used from year to year.
Books and records
It is important to maintain proper books and records when you acquire or dispose of cryptocurrency. The CRA requires that you keep all required records and supporting documents for at least six years from the end of the last tax year they relate to. According to the CRA, you should keep the following records on your cryptocurrency transactions:
• the date of the transactions
• the receipts of purchase or transfer of cryptocurrency
• the value of the cryptocurrency in Canadian dollars at the time of the transaction
• the digital wallet records and cryptocurrency addresses
• a description of the transaction and the other party (even if it is just their cryptocurrency address)
• the exchange records
• accounting and legal costs
• the software costs related to managing your tax affairs.
This article is a general discussion of certain tax and accounting matters and should not be relied upon as tax or accounting advice. If you require tax or accounting advice, we would be pleased to discuss the issues in this article with you.
