CRA, Cryptocurrencies and Capital Gains
In the first article of this series, we discussed that cryptocurrencies are a “digital representation of value” or a “digital medium of exchange”. We established that Revenue Canada treats your cryptocurrencies differently based on either how you acquired it, or how you are using it or transacting with it. In this article we cover CRA, cryptocurrencies and capital gains.
For the purposes of this article, we will discuss the tax treatment of crypto as a commodity. We’ll cover what CRA expects from you, the taxpayer, and how one should report their transactions on their tax return.
What does “commodity” mean?
Investopedia defines “commodity” as a basic good used in commerce that is interchangeable with other goods of the same type. Investors and traders can buy and sell commodities directly in the spot (cash) market or via derivatives such as futures and options.
Using that definition, we come to understand that Revenue Canada’s position is to treat cryptocurrencies similarly as stocks and other tradeable assets. But what does that mean in terms of tax? We know that gains and losses are reported on Schedule 3.
How are cryptocurrencies taxed by CRA on Schedule 3?
Under the scheme of cryptocurrencies being treated as capital property we would report our transactions on schedule 3. Here we list our proceed of disposition and adjusted cost basis against those proceeds.
What does that capital gains transaction look like?
Adjusted Cost Basis (ACB) reflects the cost on the date and time where we buy/acquire a cryptocurrency plus any network and/or exchange fees. The proceeds of disposition are self-explanatory. This is the amount in Canadian dollars that is received in exchange for our cryptocurrency. For “outlays and costs” we can also deduct our network fees and exchange fees incurred at the sale of the currency against the proceeds of disposition.
To express this in a calculation we would be looking at something like this:
Proceeds of Disposition – ACB – outlays and expenses = capital gain/loss.
How are Capital Gains Taxed?
Capital gains from the sale of crypto is taxable, but only half of the capital gain is subject to taxation. This provided a significant tax advantage for transactions that qualify for this type of tax treatment.
Should you incur a capital loss, it too is only recognized a half its value. A capital loss can only be used to reduce capital gains. It cannot be used to reduce other sources of income such as wages. Capital losses that are unused in the taxation period can be carried forward or carried back 3 years.
Swapped one crypto for another? It can get tricky with CRA.
Because CRA treats cryptocurrencies as commodities (rather than cash), when the taxpayer exchanges one crypto (say Bitcoin) for a different crypto (say Ethereum), they trigger a taxable event.
What does this look like? The transaction is treated as 2 separate events. First the taxpayer disposes of their BTC (Bitcoin) at the current rate of BTC to CAD and incurs either a capital gain or loss.
Next the taxpayer buys Eth (Ethereum) with the proceeds of the previous disposition. This event would not be taxable but would need to be recorded as the Cost Basis of the new asset ETH would result from this transaction.
These two events would look like this:
- Proceeds – ACB (CAD spent for original BTC) = gain or loss
- CAD proceeds spent for ETH = ACB of ETH
What we need to keep for supporting your entries on schedule 3:
- Date of transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party (even if it is just their cryptocurrency address)
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs.
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…