Cryptocurrency is long past its underground era. The Canada Revenue Agency (CRA) has made it clear that digital currency is taxable. It is considered a property taxed as business income or capital gain.
Common examples of taxable crypto transactions include:
- Crypto-to-fiat currency sales.
- Crypto-to-crypto trading.
- Crypto gifts.
- Crypto-paid product or service purchases.
All business income is taxable, while only half of the capital gains are. It is, therefore, essential to establish the distinction to know how each category must be reported and paid to the CRA. An accounting firm can undoubtedly help, but it also pays to understand how crypto taxes work.
Business earnings and taxes
If an activity fulfills a commercial purpose, requires business planning, upholds a product, or produces profit by design, any earnings from it are considered business income. Particularly, crypto purchases for profits count as business income.
Because business crypto events are subject to income tax, not capital gains tax, 100% of any earned profits are taxable. Such transactions can include crypto day trading and crypto mining and staking.
Although the CRA may consider the latter as a personal activity or hobby, it is known to assess cases individually. The agency has also expressly stated its inclination to treat crypto mining and staking as a business subject to business income tax.
Suppose cryptocurrency is part of a business’s inventory. In that case, it must be valued consistently yearly using either of the two methods prescribed by the CRA. One is valuing an inventory item at the cost it was acquired or its current fair market value (FMV), whichever is less. The other is valuing the entire inventory at its FMV yearly.
In any case, the CRA wants “adventure or concern in the nature of trade” inventories valued at cost. These inventories are those related to isolated transactions not considered a business.
Personal income, taxes, and capital losses
Personal crypto users or hobbyists sell, trade, or swap digital currency for a profit. When they do this, they only pay taxes on half of their capital gains at their usual income tax rate. How long they’ve held the assets has no impact on this rate.
Gifting someone with crypto can also lead to a capital gain or loss, and buying goods and services with the same is considered a barter deal. Thus, anyone receiving crypto as payment for goods and services will have a capital gain or loss on the disposed of asset’s value adjustment from when they held it.
While capital losses can offset other capital gains in Canada, they do not impact income. On tax years where losses exceed gains, offsetting gains from the last three years is an option. If these prior gains are still insufficient for offsetting, the losses can offset future gains.
There’s no question cryptocurrency has gone mainstream, but taxation issues can still be a blur. Whether it’s defining the difference between business income and capital gain or distinguishing an isolated transaction from a full-fledged commercial activity, possibilities can be tricky. This is where the help of a reputable accounting firm such as Faris CPA can prove crucial. They can help you determine which assets are taxable, especially if you are into cryptocurrency.