Although cryptocurrency has been around for several years now, it is still surrounded in mystery. Many people do not understand what cryptocurrency is, how it is mined, how it is traded, and how to treat it for tax purposes. The taxation of cryptocurrencies in Canada is particularly complex because they may differ in tax treatments and rates between individuals. If you would like to understand how cryptocurrency affects you, consider contacting an experienced tax lawyer at Jeremy Scott Law by calling (902) 403-7201.
February 2023 Update – GST/HST and Crypto Mining – CRA Administrative Guidance Released!
On February 4th, 2022, the Canadian Department of Finance announced draft legislative changes to the Excise Tax Act – containing new rules respecting the application of the GST/HST to mining activities. The Canada Revenue Agency has finally released administrative guidance with regard to these proposed changes. In brief, as of February 4th, 2022 the mining of crypto-currency will not be a supply made in the course of a commercial activity, and as such GST/HST will not be required to collected on mining revenues, and input tax credits will not be available with regards to the GST/HST incurred on mining related expenses. Interestingly, the CRA also notes that miners may need to review their operations to determine if GST/HST self assessments are required as a result of these proposed legislative changes.
What Is Cryptocurrency?
Cryptography is the process that makes a token of digital currency unique and secures it as a valuable asset. While it is described as “currency,” Canada does not treat cryptocurrency as an actual currency like a dollar. Instead, cryptocurrency is handled like a commodity, which means it is treated as capital gains or business income. There are different types of cryptocurrencies, such as Bitcoin and Litecoin, and each are valued and reported separately.
What Are NFTs?
NFT stands for non-fungible tokens and are one type of cryptocurrency. This type of cryptocurrency usually involves intellectual property, such as:
An NFT is taxed when you receive income from it by selling, trading, or exchanging it, not when you purchase it or if it increases in value while you own it.
Cryptocurrency, NFTs, and Taxes
According to the Canada Revenue Agency, cryptocurrencies are considered a commodity. They can be taxed as either capital gains or business income. Cryptocurrency is taxed based on when you dispose of it. Taxes can be incurred when you sell, trade, exchange, convert, or make purchases with cryptocurrency.
Here is how cryptocurrencies and NFTs are taxed:
If your cryptocurrency is taxed as business income, you will be responsible for paying income tax on the entire amount of the transaction’s earnings.
The Canada Revenue Agency says that it decides whether a transaction is business income or capital gains on a case-by-case basis. Furthermore, the Canada Revenue Agency may consider some transactions from the same investor as capital gains and others as business income. However, some guidelines that may indicate the transaction will be considered business income include:
- The crypto activity was conducted for commercial reasons
- The investor promoted a product or service
- The investor intended on making a profit
- The crypto activities are regular or repetitive
Generally, the more active a person is in crypto trading, the more likely the Canada Revenue Agency is to find that the transaction is business income. Additionally, if you acquire cryptocurrency by mining, the Canada Revenue Agency will generally find that you have business income, and 100% of the earnings will be taxed.
For NFTs, if you created and sold or traded your own NFT, the transaction will be considered business income. 100% of the earnings are taxed.
If the cryptocurrency transaction is treated as a capital gain, you are responsible for paying capital gains tax on half of any profits you receive from the transaction. Capital gains tax may be owed on any profits you make from cryptocurrency after you:
- Sell it
- Trade it for another type of cryptocurrency
- Spend it on goods or services
- Gift it to someone else
In the case of NFT, if you sold an NFT that you previously purchased, it will generally be considered a capital gain. 50% of your earnings will be taxed.
Reporting Cryptocurrency on Your Tax Return
Cryptocurrency should be reported when you go through taxable events, which includes realizing or generating income. If you owe capital gains tax on your cryptocurrency transactions, you typically add up all of your capital gains, divide them by 2, and pay tax on this amount. You report capital gains on Schedule 3.
If the transactions are considered business income, you must complete Form T2125 and include it with your tax return.
If you fail to report this income on your tax return, you could be subject to penalties and other legal consequences. The consequences may be similar to those incurred by failing to report other Canadian dollar earnings and could result in a finding of tax evasion.
Keeping a careful record of your trades, profits, and losses can help ensure that you have accurate information to report to the Canada Revenue Agency. This evidence can also help ensure that the Canada Revenue Agency does not charge you more tax than you owe or refuse to accept your losses as valid.
How Much Tax Do I Pay on Cryptocurrency in Canada?
You must report 100% of your business income earnings on your tax return. The amount of tax you pay depends on your entire tax picture, based on your total earnings for the tax year. If the cryptocurrency transactions are general investments and considered capital gains, you will owe tax on 50% of the earnings. For example, if you purchased $3,000 of Bitcoin and sold it two years later for $4,000, you would owe taxes on $1,000 if the transaction is considered business income or $500 if the transaction is considered a capital gain.
Is there GST/HST on Cryptocurrency?
The Federal Department of Finance released draft GST/HST legislation on May 17, 2019 which included provisions the intention of which were to treat virtual currency (e.g., Bitcoin) as a financial instrument for GST/HST purposes. As a result of these changes, cryptocurrency is now included in the definition of financial instrument effective May 18,2019. The sale of qualifying virtual currency, including cryptocurrency therefore does not attract GST/HST after May 18, 2019.
The GST/HST status of a sale of cryptocurrency prior to May 18,2019 is less certain. It appears that the CRA holds the view that sales of cryptocurrency prior to May 18,2019 constitute a commercial activity and were subject to GST/HST when sold. Taxpayers facing proposed reassessments on account of sales of cryptocurrency prior to May 18, 2019.
How Can You Avoid Tax on Cryptocurrency in Canada?
Fortunately, there are several ways that you could potentially avoid tax on cryptocurrency in Canada or reduce the amount of tax you have to pay. Some tax strategies Jeremy Scott Law may implement include:
- Offset gains with losses – Just like with other types of capital gains, you could potentially minimize the tax obligation by offsetting gains with losses. Losses can be carried forward into future tax years and claimed against gains on cryptocurrency transactions.
- Make donations – Another strategy is to make charitable donations using cryptocurrency. This strategy allows you to offset capital gains.
- Use the personal tax allowance – If your only form of income for the year is cryptocurrency, the first $14,398 you make in income is not taxed in Canada for the 2022 financial year.
Contact Jeremy Scott Law for Help
If you would like more information about taxation of cryptocurrencies in Canada or need assistance with your tax return, consider contacting Jeremy Scott Law. You can schedule a confidential consultation to ensure your financial and legal rights are protected by calling (902) 403-7201.