Cryptocurrencies, such as Bitcoin, are decentralized currencies, therefore not regulated by a central authority like a bank or government. Decentralized currencies are contrasted with fiat currencies. Fiat currencies are regulated. That means their value is backed by the assets of a country or raw materials.
All forms of digital currencies are taxable commodities in Canada. If you profit from cryptocurrency or use it for business purposes, these transactions and any income must be reported with your annual income tax. The easiest thing to do is to keep a detailed record of the date of your transactions and what each transaction is for. Precisely how you are taxed is determined based on your use of Bitcoin or other cryptocurrencies. The main distinction the CRA makes is between capital gains and income, which is why you must keep good records.
While cryptocurrencies are highly anonymous, they are not totally anonymous. As the popularity and uses for cryptocurrencies have increased, so have the attempts to regulate them. Bitcoin is difficult to trace but not impossible. As of 2021, all Canadian crypto exchanges must be registered to sell securities in Canada legally. More importantly, cryptocurrency exchanges that legally operate in Canada may reveal their users’ identities to Revenue Canada when necessary.
Therefore, all transactions made on exchanges must be recorded and reported to the Canadian Revenue Agency. Most exchanges that operate in Canada are registered with FINTRAC, a credit and identity agency. FINTRAC also monitors financial institutions and persons to control money laundering and terrorist activity. What’s more, the CRA has begun analyzing Bitcoin transactions. Likewise, the FBI has kept a close watch on Bitcoin for years. Therefore, it is not advisable to sidestep current taxation policies, as it may result in further fines and charges.
- Selling or trading cryptocurrencies for a profit or a loss
- Gifts in the form of cryptocurrency
- Exchanging cryptocurrency for any fiat (regulated) currency
- Operating a business that exchanges cryptocurrencies or accepts them as a method of payment
Fiat Currencies v. Cryptocurrency
Even though Bitcoin and digital currencies work just like cash, the Bank of Canada does not treat them as legal tender. Instead, all cryptocurrencies are treated as commodities. Commodities can be any kind of valuable good, real estate, or stock in your portfolio. And just as Canadian’s are taxed when these traditional assets earn a profit, so are cryptocurrencies.
Just because you own cryptocurrencies does not mean that you will be taxed. The easiest way to determine if you will be taxed on your cryptocurrency is by asking yourself these questions:
- Do you cryptocurrency use functions as a source of income?
- Do you earn irregular profits from your holdings?
- Did you use a Canadian exchange to sell your cryptocurrency for CAD or another fiat currency?
PST and GST
Functionally, cryptocurrencies work just like cash. If you operate a business in Canada that accepts Bitcoin and other cryptocurrencies, you will need to collect and remit GST and/or HST. The fine-grained distinction is between legal tender and barter transactions.
When a business accepts digital currency, the transactions are treated as barter transactions. A barter transaction means that goods and/or services are exchanged for non-fiat currency. Another example of a barter transaction is exchanging Spanish lessons for groceries.
Barter transactions fall into two categories: taxable and non-taxable. Non-taxable transactions are those valued under $900 CAD. Taxable transactions are over $900 CAD and occur regularly. The same goes for your cryptocurrency purchases.
When reporting barter transactions, the value of the exchange needs to be converted into CAD. The valuation of cryptocurrency is based on fair market value. The easiest way to determine this value is based on the market rate at the time of purchase. To be consistent, use the values determined by a reliable cryptocurrency exchange.
Here is what to remember when filing your Canadian taxes. Any of the following actions may be taxable and must be reported:
- Profits and losses from the trade or sale of cryptocurrencies. This includes exchanges between cryptocurrencies pairs, and not just from BTC to CAD, for example.
- If you operate a business that buys or sells cryptocurrency, such as an exchange and any other consistent commercial operations that use cryptocurrencies.
- Taxable businesses include ATMs and cryptocurrency mining.
Lastly, cryptocurrency taxation and policy-making are a quickly evolving area of Canadian law. Be sure that you remain up to date with current policies by visiting the CRA website. It is the responsibility of Canadian taxpayers to understand how their income is taxed.