We live in a digital age—information is transferred and transactions are completed at a speed never thought possible. We have seen some amazing innovations 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 its value—has left many people who have traded, earned, or transacted using it wondering how to treat it for tax purposes.
The CRA provides 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 recognized 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 they should also 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, then 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 services or goods 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 now 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 GST/HST that applies to the property or service is calculated based on the fair market value of the cryptocurrency at the time of the exchange.
Trading cryptocurrency
Cryptocurrency can also be bought, sold, exchanged (for another cryptocurrency or government-issued currency), or transferred (as a gift or donation). 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 both the nature of and the frequency of the transactions. Other factors to consider could also 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.
A taxpayer can transfer cryptocurrency to an account offered by a cryptocurrency exchange and lending platform to earn a variable return. In such cases, the CRA has stated that depending on the terms of the contract with the platform that holds the cryptocurrency, the transfer to the platform may be considered a disposition for tax purposes resulting in a gain or loss, or capital gain or loss.
For example, a disposition for tax likely occurs when a deposit of cryptocurrency is made if the platform meets the following conditions:
- can hold the cryptocurrency in its own name;
- has the right to pledge, sell, lend, or otherwise transfer or use the cryptocurrency deposited in the account at its discretion without informing the taxpayer;
- retains the profit derived from using the cryptocurrency; and
- when the taxpayer withdraws an amount up to their account balance, the cryptocurrency may be paid from a cryptocurrency wallet made up of the collective deposits from various customers.
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 cost that exceeds CDN$100,000 at any time during the year, either directly or indirectly, that is not used or held exclusively while carrying on an active business, will have an obligation to file Form T1135 to report the property. The determination of whether cryptocurrency is situated, deposited, or held outside of Canada can be complex.
In addition, the exclusion for “carrying on an active business” would not be available where, based on the degree of activity and particular facts, a taxpayer is engaged in “an adventure or concern in the nature of trade” and is not considered to be carrying on a business. This means that in such circumstances, reporting the property on Form T1135 would be required, even if cryptocurrency transactions are reported on account of income in the taxpayer’s tax return.
Earning cryptocurrencies through mining
Mining cryptocurrency involves using specialized 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 payment 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.
When a taxpayer mines cryptocurrency in a commercial and business-like manner, the value of the cryptocurrency mined would be included in the miner's business income for tax purposes. Since cryptocurrency mining can be a complex undertaking that generally involves the use of highly specialized 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 miner may be able to claim capital cost allowance on their crypto-asset mining equipment and deduct expenses incurred for electricity to reduce the net amount of mining income included in taxable income.
Be aware—individuals who are considered non-residents of Canada for tax purposes, and are using mining equipment located in Canada, may be required to file a Canadian tax return.
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 recorded properly, the CRA's website suggests regularly exporting your history of trades (purchases, sales, and swaps), transfers (deposits and withdrawals of all types of currency), and any other types of transactions in case the exchange stops operating or stops offering services in Canada, or the taxpayer loses access to their account. The CRA's website states the following records should be maintained:
- the number of units and type of cryptocurrency;
- the date and time 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 addresses, and the beginning and ending wallet cost and balance for each cryptocurrency;
- a description of the transaction and the other party (even if it is just their cryptocurrency address);
- the exchange records;
- accounting and legal costs; and
- the software costs related to managing these transactions.
- In addition, those who mine cryptocurrency should also 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
- the mining pool details (e.g. legal agreements) and records of mining activity within each pool.
What are the tax implications of being paid a 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.
How BDO can help
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.
Contact your BDO advisor if you have questions about how your cryptocurrency transactions may be taxed.
Learn more about BDO's International Tax services.
The information in this publication is current as of February 22, 2024.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.