Cryptocurrency can be described as a medium of exchange of value, a digital asset, any form of currency that exists digitally or virtually and uses cryptography to secure transactions. According to Canada Revenue Agency, cryptocurrency is treated as a commodity for taxation purposes.
The trading of crypto can be considered business income/loss or a capital gain/loss depending on the circumstances. Many factors such as frequency of transactions, education level of the investor, quantity of units need to be considered when determining whether income resulting from cryptocurrency transactions is considered on account of income or capital. This is a very important point as only 50% of capital gains are taxable, while 100% of income is taxable.
Obviously, the sale of cryptocurrency is a taxable event, but did you know that other activities could also trigger taxability? When you use cryptocurrency to pay for goods or services, the CRA treats it as a barter transaction for income tax purposes.
You are considered to have sold cryptocurrency (and therefore triggered a taxable event) in the following cases:
- You sold or gifted cryptocurrency
- You traded or exchanged cryptocurrency, including disposition of one cryptocurrency to get another cryptocurrency
- You converted cryptocurrency to government-issued currency, such as Canadian dollars
- You used cryptocurrency to buy goods or services
The complexity of accounting for crypto is that each type of cryptocurrency is considered to be a separate digital asset and must be valued and accounted for separately.
As a trader, whether for business purpose or as a personal investment, the user is required to keep appropriate and verifiable books and records.
The following records need to be kept for all cryptocurrency transactions:
- the date of the 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.
Key takeaways:
- Keep good records to show how you figured out the value
- Whenever a direct value cannot be determined, a reasonable method must be used
- According to CRA, fair market value is considered the highest price (expressed in dollars) that could be obtained on the open market
- Whichever method you choose, use it consistently.