Part 1

How does the CRA view cryptocurrency transactions for tax purposes

Part 2

How to minimize your taxes on cryptocurrency

Part 3

Offshore structures

How does the CRA view cryptocurrency transactions for tax purposes

Are you making profits in the market from your cryptocurrency? If you’ve liquidated any of your cryptocurrencies in 2021 and have made significant gains, the Canada Revenue Agency (“CRA”) is going to want a slice of your digital profit pie.

How does the CRA view cryptocurrency?

The Currency Act defines legal tender as bank notes issued under the Bank of Canada Act or coins issued by the Royal Canadian Mint Act. With these definitions, cryptocurrencies such as Bitcoin or Ethereum do not fall into the category of legal tender or coins, and the courts do not view them as actual money. Instead, CRA views all cryptocurrencies as digital representations of value and a medium of exchange of goods and services between people who agree to use them. This means that cryptocurrencies, in general, are treated similarly to commodities like gold or oil. When cryptocurrency is exchanged for Canadian dollars or other fiat currency, there will be a corresponding gain or loss, depending on the price that the cryptocurrency was purchased at. Additionally, the CRA will classify this as a barter transaction f cryptocurrency is traded for other cryptocurrencies or non-fungible tokens (“NFTs”).

What’s a barter transaction?

The amount of fiat currency (e.g. Canadian dollars) used to purchase the crypto coin is known as the “adjusted cost base” when purchasing any cryptocurrency. While there are continuous changes in the fair market value of the purchased cryptocurrency, there will only be tax consequences when a gain or loss is realized through sale or exchange; this means that if you hold cryptocurrency, and it increases in value, tax is only payable in the year that it is sold. Similarly, the CRA also looks at when cryptocurrency is used in exchange for goods or services and is considered a bartered good when two parties agree to exchange it as such. An example of a barter transaction is cryptocurrency being exchanged for a pair of Toronto Maple Leafs tickets. The cryptocurrency would be deemed to be sold for the fair market value of the tickets. If the cryptocurrency was initially purchased for less than it was sold for, the difference is counted against the purchaser for income tax purposes. This deemed sale through a barter transaction also applies to exchanging different cryptocurrencies for one another, as well as when cryptocurrency is used to purchase services rendered, such as cleaning, repairs, or seeking legal advice from Millars Lawyers (did you know we’re one of the first law firms to accept cryptocurrency for our services?).

With the sale or barter of cryptocurrency, gains based on the adjusted cost base will be treated as either business income or capital gains (losses below the adjusted cost base apply similarly). The difference between business income and capital gains is substantial from a tax perspective. All business income is added to an individual’s taxable income for the year, while only 50% of capital gains count as income in a given tax year. In determining whether income is either business income or a capital gain, CRA will typically look at the circumstances surrounding the purchase and sale of the cryptocurrency.

Will I be treated as business income or capital gains?

A large indication as to whether or not the tax treatment of your cryptocurrency dispositions will be business income is based on the volume or number of transactions occurring during the calendar year. Day traders, for instance, have an active pursuit for frequent short-term profits, which are consistently treated as business income for those individuals. The opposite holds true for those with a long-term, buy-and-hold strategy. When a cryptocurrency is bought and held for long periods, or an individual makes infrequent purchases and sales of cryptocurrency, income from these activities will likely be treated as capital gains. Only 50% will become added to the individual’s taxable income.

Please contact Millars Law for all your cryptocurrency needs, and stay tuned for part 2, where we discuss how you can plan ahead to minimize your cryptocurrency tax.

So what happens when I actually sell my crypto?

With the sale or barter of cryptocurrency, gains based on the adjusted cost base will be treated as either business income or capital gains (losses below the adjusted cost base apply similarly). The difference between business income and capital gains is substantial from a tax perspective. All business income is added to an individual’s taxable income for the year, while only 50% of capital gains count as income in a given tax year. In determining whether income is either business income or a capital gain, CRA will typically look at the circumstances surrounding the purchase and sale of the cryptocurrency.

Will I be treated as business income or capital gains?

A large indication as to whether or not the tax treatment of your cryptocurrency dispositions will be business income is based on the volume or number of transactions occurring during the calendar year. Day traders, for instance, have an active pursuit for frequent short-term profits, which are consistently treated as business income for those individuals. The opposite holds true for those with a long-term, buy-and-hold strategy. When a cryptocurrency is bought and held for long periods, or an individual makes infrequent purchases and sales of cryptocurrency, income from these activities will likely be treated as capital gains. Only 50% will become added to the individual’s taxable income.

Please contact Millars Law for all your cryptocurrency needs, and stay tuned for part 2, where we discuss how you can plan ahead to minimize your cryptocurrency tax.

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