Canada Revenue Agency & Cryptocurrencies

CRA and Crypto!

In this brief article we will briefly cover the Canada Revenue Agency and their approach to cryptocurrencies.

What the heck is a cryptocurrency?!?

Let’s start with the basics! A cryptocurrency is a digital currency where transactions are verified, and records maintained by a decentralized computer network using cryptography. It simply is a digital medium of exchange. In these networks there is no central authority that controls the currency; there is no central bank or government.

Although, most governments, including Canada, make it clear that cryptocurrencies are not legal tender or considered “money” for everyday transactions. But we should remember that cryptocurrencies still fulfil the criteria of currency that is:
• a medium of exchange,
• a store of value, as well as
• a unit of account.
Two examples of cryptocurrencies on the market today are Bitcoin and Ethereum. Bitcoin being the first cryptocurrency created in 2008 by Satoshi Nakamoto.

How does Revenue Canada view cryptocurrencies if not as currency?

Simply put, the CRA treats cryptocurrencies as commodities. But the answer is a bit more complex than that! It depends on the circumstance in which it used or acquired. Revenue Canada may treat cryptos as business income or a capital gain. If crypto is used in the context of a business it would be treated as inventory, but if it is used personally, in trading for instance, it would be a capital asset! If you happen to be mining crypto then your mining rewards may be income and an inventory.

There are advantages and disadvantages to each classification of cryptocurrency for tax purposes. For instance, when incurring capital gains, half the gain is taxed at your marginal tax rate. This can spell significant tax savings when properly applied. Canada Revenue Agency does have a brief guide which can help with this topic.

So, what now?

It is important that you discuss your situation with a tax professional to ensure that you are properly reporting and classifying your activities related to cryptocurrencies. Improperly filing your tax return could cost you a significant amount of tax; either upfront, costing you more tax than should have been assessed, or later when CRA reviews your return and reclassifies the income reported.

Tune in for the next article in the series where we explore more on the Canadian taxation of cryptocurrencies…