Cryptocurrency and taxes

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Cryptocurrency and taxes

by UFile Team Équipe ImpôtExpert | Apr 29, 2022   Comments:

UFile Blog - Cryptocurrency and taxes

A revolution has occurred in the way that people invest and exchange funds through the advent of cryptocurrency. The CRA has noticed and has laid out how it is taxed. Let’s take a look.

Cryptocurrency is considered a taxable commodity

To the CRA (Canada Revenue Agency), cryptocurrencies such as Bitcoin and Ethereum are treated in the same way as any other commodity, like gold or oil. At its base, profits made from trading commodities are considered a capital gains transaction. Only 50% of the profit would be taxable on your tax return.

Can it be considered business income?

Under certain circumstances, yes. The CRA determines this on a case-by-case basis, but there are common factors that will tip the scale towards business income:

  • frequency of transactions – quick turnover of assets (day trading)
  • amount of time the assets are held ­– short period of time
  • knowledge of the market – you have extensive knowledge of cryptocurrency
  • time spent on transactions – a substantial part of your time is spent studying the cryptocurrency markets and investigating potential purchases
  • financing – your cryptocurrency purchases are financed primarily on margin or by some other form of debt
  • advertising – you promote a product or service related to cryptocurrency
  • intent to make a profit – you undertake activities in a businesslike manner even if you are unlikely to profit in the short term
  • purchase of capital assets or inventory – you buy equipment for the purpose of cryptocurrency trading

The last two points above lead to another aspect of cryptocurrency income, which is mining for virtual currency like Bitcoin. Mining involves using specialized computers to solve extremely complex computational math problems. Once a problem is solved, the computer receives a block of bitcoins. Activities related to mining would match a lot of the factors mentioned above as being business income.

Cryptocurrency in tax-sheltered accounts

Unfortunately, you cannot own cryptocurrency directly in a tax-sheltered account like an RRSP or a TFSA. What you can own in those accounts are crypto-based Exchange Traded Funds (ETFs) that are backed by cryptocurrencies.