The meteoric rise, and subsequent tailspin, in the price of bitcoin has incited rampant investment in cryptocurrencies. Over 1,400 coins or tokens are now in “circulation”. Often lost in the resplendence and chicness of buying and selling cryptocurrencies are the tax consequences.
At a basic level, cryptocurrencies (or “crypto”) are property for purposes of the Income Tax Act (Canada). As such, dispositions of crypto ordinarily give rise to income tax consequences. If the disposing taxpayer held the crypto for long-term investment purposes (in tax circles, as “capital property”), a capital gain – or loss – normally arises. If held as part of an active business, or even as a one-off venture to make a profit, any gain would ordinarily be fully taxable as business income. The gain in either case would generally be computed as the difference between the cryptocurrency’s sale price and its original acquisition cost. There is no bright-line test to determine whether the gain derived from the investment in cryptocurrency is a capital or current gain. Recent court cases indicate that the factors to be considered in determining whether the taxpayer’s income is capital or active in nature :
- the frequency of the transactions
- the duration of the holdings
- the intention to acquire the securities for resale at a profit
- the nature and quantity of the securities, and
- the time spent on the activity
- particular knowledge possessed
A common myth is that sales of crypto in exchange for other crypto – or “crypto-to-crypto” trades – are non-taxable. Unfortunately, crypto-to-crypto trades are barter transactions and thus taxable events.
Another common myth is that one can trade crypto with minimal to no detection risk by outside parties, such as the Canada Revenue Agency (CRA). Enhanced privacy, digital confidentiality, and near unfettered secrecy have imbued the crypto community with a false sense of impenetrable anonymity. Even crypto held in cold storage or traded outside an exchange may be uncovered through the many tools at the CRA’s disposal.
Ultimately, persons dealing in crypto have many special tax considerations. Crypto held outside Canada (most notably, on foreign exchanges) may require special disclosure on foreign reporting forms. GST/HST obligations may unsuspectingly arise in day-to-day transactions, particularly for those involved in crypto mining (whether based on proof of service or proof of work). Theft and hacking, which is rampant in the crypto world (see January 2018’s theft of USD$534 million from Coincheck in Japan), carries its own host of tax consequences.
The potential for blockchain technology is limitless. Along with the rewards, however, come a variety of risks, not the least of which is tax. Failure to comply with all applicable tax obligations can result in severe penalties and hefty arrears interest.
If you have questions regarding cryptocurrency transactions or it’s tax obligations, please contact us.