Cryptocurrency as a Digital Asset Subject to Tax Regulations
Cryptocurrencies are a relatively new concept. In Canada, citizens can now hold cryptocurrencies such as Bitcoin or other virtual currencies, in addition to their traditional bank-held dollars. These cryptocurrencies, also known as altcoins, can be used similarly to dollars for transactions of goods and services, provided both parties agree. However, it’s important to note that cryptocurrency becomes taxable when it generates income. In other words, any profits from transactions involving cryptocurrencies are subject to tax.
Income from Disposing of Cryptocurrency
Disposing of cryptocurrency involves giving, selling, or transferring an asset. Income from these disposals is taxable, unlike merely holding cryptocurrency, which is not. Certain transactions with cryptocurrency may trigger taxes, including:
- Selling or gifting cryptocurrency.
- Using virtual currency to purchase goods or services.
- Exchanging or trading cryptocurrency for another.
- Converting cryptocurrency into dollars or other currencies.
Fair Market Value of Cryptocurrency Transactions
It’s essential to assess the value of your cryptocurrency transactions thoughtfully and reasonably. When no initial value is established, the transaction should be based on the highest dollar price it could have been executed at. The concept of “fair market value” is crucial because the Canada Revenue Agency (CRA) considers using cryptocurrency as a barter between consenting parties to avoid using legal tender. Keeping documentation of the source of your cryptocurrency income is recommended. Maintaining a record of all transactions will help justify these earnings in case of a CRA inquiry. It is important to note that failing to declare income from cryptocurrency disposals is considered tax evasion.
Business Income or Capital Gain?
To properly declare income from cryptocurrency disposals, you need to determine if it’s business income or a capital gain.
- Business Income:
- Business income applies when you engage in commercial activities that provide your livelihood.
- This includes creating a business plan, acquiring assets or inventory, promoting products and services, and seeking profits.
- These activities must be repetitive to be considered a source of business income, although a single significant transaction could also be seen as a commercial activity.
- Capital Gain:
- A capital gain occurs when the sale of cryptocurrency is not related to your business activity.
- Another condition is that the sale price is higher than the initial purchase price.
- In the case of a capital gain, only half of the declared amount is taxable.
GST/HST and Cryptocurrency
If you receive cryptocurrency payments for goods or services, you may be subject to GST/HST. This tax should be calculated based on the fair market value of the goods or services at the time of the exchange.
NFTs as a Form of Cryptocurrency
Non-Fungible Tokens (NFTs) are digital assets linked to items such as songs, videos, or images. Trading or exchanging NFTs is subject to income tax, just like Bitcoin. However, not all NFTs are taxed in the same way:
- Selling your own NFT is considered business income, and the entire amount is taxable.
- On the other hand, selling an NFT you previously purchased is treated as a capital gain, and only half of the amount is taxable.