What happens when you use crypto to buy things?!?
In previous articles we discussed several items in relation to the taxation of cryptocurrencies (crypto) in Canada. We established that CRA seeing these as commodities. Revenue Canada may treat cryptocurrency taxable events as capital gains or business income. In this article, we will address what kind of taxable event, if any, occurs when you buy products or services using cryptocurrencies.
Barter Transactions, Crypto, and CRA.
The Revenue Canada website simply states that when you buy something with crypto it is considered a barter transaction. The website then points us to an Interpretation Bulletin which discusses barter transactions.
Let’s looks at this closer at a barter transaction. A barter transaction occurs when two parties agree to exchange [product/services without using “legal tender”. Legal tender being a form of money, or medium of exchange, which hold legal status conferred by government to settle monetary debt.
Great, now what!?!
What does a barter transaction mean in terms of taxation? When you buy something with crypto you are deemed to have disposed of the cryptocurrency at the current Canadian dollar value of that currency.
This means that when you do buy something with crypto, you need to keep track of what the price of that cryptocurrency was at the time and date of that transaction. This number serves as the proceeds of disposition of that underlying asset.
We also factor in any network and/or exchange fees at the time of purchase and record these as outlays and expenses. These outlays are used to reduce the possible gain incurred.
Then you need your ACB for that cryptocurrency to determine what your capital gain or loss may be on that transaction. Your ACB is made up of the price you paid for the cryptocurrency plus and exchange and/or networks fees incurred at the time of the transaction.
To express this in a calculation we would be writing at something like this:
Proceeds of Disposition – ACB – outlays and expenses = capital gain/loss.
What you need to keep for supporting your barter transactions:
- 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
- a description of the transaction and the other party (even if it is just their cryptocurrency address)
- the exchange records
- accounting and legal costs
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…