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Global Law Experts Newsletter December Article: Is Bitcoin Taxable In Canada?

posted 3 years ago

The legal requirements for dabbling in cryptocurrencies remain vague for many online traders. If you are now interested in getting into Bitcoin or other currencies, it is common to have reservations.

One of the critical questions that people trading digital currencies are asking is: Is Bitcoin taxable? In this short article, you will discover more about Bitcoin, its treatment as a currency, and the taxes associated with them.

Understanding the Basics of Bitcoin

The Bitcoin system is a currency structure where bitcoin function as a digital currency, serving as a medium of exchange. 

Bitcoin, like other cryptocurrencies, use cryptography to ensure secure online transactions. 

A bitcoin has no physical form and does not provide any inherent property rights to its owner. Instead, a bitcoin owner uses a bitcoin wallet on a  phone, tablet, or computer. Bitcoin transactions do not use a third party for security or creation. 

Traditionally, the leading central bank of a country creates currency. For crypto, a third party, usually a bank or an online payment processor, confirms online transactions.

Data mining facilitates the Bitcoin system, which relies on a peer-to-peer connection of computers. 

Is Bitcoin Taxable in Canada?

In Canada, Bitcoin and other cryptocurrencies do not constitute either currency or money. In a 2014 briefing, the Bank of Canada stated that cryptocurrencies do not meet the definition of money.

For tax purposes, the Canada Revenue Agency (CRA) classifies Bitcoin as a commodity, much like oil or gold. So, it follows that the tax regulations on barter arrangements may also apply to transactions using bitcoin.

Any income from bitcoin transactions may be considered a business income or capital gain. Additionally, losses from these transactions may also be considered capital or business losses.

Therefore, taxpayers must prove if a bitcoin activity leads to income or capital. The action will influence the treatment of the revenue for income tax purposes. 

This statement means that not everyone who trades bitcoin online engages in business activities. 

When you use cryptocurrencies to pay for services, the CRA may consider this activity a barter transaction for income tax purposes. By definition, a barter occurs when an exchange of goods or services occurs without using traditional currency. 

So, it would be smart if you had a dependable way of figuring out a bitcoin transaction value. This statement is true, especially when you cannot confirm a direct value.

Keep records that prove exactly how you ended up with the bitcoin value. The position of the CRA on this matter is that the fair market value is always the highest price declared in a dollar amount agreed upon by the two parties involved in the transaction. 

If you have cryptocurrencies other than bitcoin in your e-wallet, each cryptocurrency is considered a separate asset. Meaning every currency must be valued separately. 

So, if you have bitcoin, they need to have a different value from your litecoin.

In Canada, courts evaluate a wide range of factors when deciding whether to classify a transaction’s losses or gains as on account of capital or income. For bitcoin transactions, these factors may include:

  • Frequency of transactions – a history of extensive selling and buying of bitcoin or a quick property turnover
  • Period of ownership – the bitcoins are owned only for a short time
  • Knowledge of bitcoin markets – the taxpayer’s experience in the bitcoin markets
  • Relationship to the taxpayer’s other work – bitcoin transactions and their effect on the taxpayer’s ordinary business
  • Time spent – the amount of the taxpayer’s time spent learning about the bitcoin markets and investigating potential buys
  • Financing – how bitcoin transactions are financed
  • Advertising – the taxpayer has promoted or otherwise announced their desire to purchase bitcoin

Cryptocurrency Taxes in Canada:  Reporting Business Income or Capital Gains Using Cryptocurrency

Global Law Experts Newsletter December Article: Is Bitcoin Taxable In Canada?

Disposition refers to the way you dispose of something, which can be through selling, giving, or transferring. Generally, owning a cryptocurrency is not taxable. But you may face tax consequences when you do the following:

  • Sell bitcoin or send them as a gift.
  • Exchange or trade cryptocurrency, including trading one cryptocurrency to get another cryptocurrency.
  • Convert cryptocurrency to traditional currency, like Canadian dollars.
  • Use cryptocurrency in exchange for goods or services.

The income you get from cryptocurrency disposition may be considered a capital gain or business income. To report your taxes accurately, you must first establish what kind of income it is.

Below are the usual indicators that you may be operating a crypto-based business:

  • You operate for commercial reasons and use a commercially viable approach.
  • You work in a businesslike manner, which involves having a business plan and acquiring inventory or capital assets.
  • You advertise, promote, or market a product or service.
  • You demonstrate the intention to make a profit, even if you are unlikely to secure any in the short term.
  • You conduct business activities that involve regularity or a repetitive process over time.  

Some common types of cryptocurrency businesses are the following:

  • Cryptocurrency mining
  • Cryptocurrency trading
  • Cryptocurrency exchanges

Even a single bitcoin transaction can be considered a business in certain circumstances. That said, whether you are operating a business or not is determined on a case-by-case basis. 

Another factor that can prove business activity is the date when the operation begins. If you are still setting up to go into business, there may not be any business activities that took place. 

You have to complete a significant transaction that is part of your income-earning process for it to be considered a business activity. Any money or assets you gain before your business begins are not considered business income.

Advantages of Cryptocurrency 

User autonomy

Unlike traditional currencies, cryptos are not subject to various restrictions and risks. Crypto promises user autonomy because its price is not associated with specific government policies.

Pseudonymous

Bitcoin transactions have a verification process that helps prevent crime. The procedure places an intermediary firmly in charge of the transaction, allowing users to control the provisioning of services to specific parties.

Peer-to-peer basis transactions

The Bitcoin system is purely peer-to-peer, meaning that users can send and receive payments to or from anyone on the network.

Is Bitcoin taxable in Canada? Find out the tax requirements of trading crypto in Canada by calling Taxpage today. 

Pro Tip 

“Bitcoins and other cryptocurrencies may be treated differently from other currencies. If you are worried about how you should report income you have earned in Bitcoins, seek the advice of a Canadian tax lawyer.”

Looking for the Best Advice on Bitcoin Taxes? Contact Taxpage Now

Today, more and more Canadians see potential in trading Bitcoin and other cryptocurrencies. 

However, taxpayers must ensure they are updated with their asset reporting obligations under domestic Canadian tax law when handling bitcoin. Otherwise, the CRA may order a tax assessment and issue significant penalties. 

To get more information about bitcoin taxes in Canada, contact Taxpage today. With the help of our experienced tax lawyers, you can get the best legal advice you need when trading bitcoin.

Is Bitcoin Taxable In Canada FAQs

How can I reduce my taxes on crypto in Canada? 

There are legal consequences to avoiding your cryptocurrency taxes. But, there are simple methods to reduce your tax liability. You can add transactions fees to your adjusted cost basis to lower your overall capital gains. You can also write off associated expenses, including equipment and electricity.

Can the CRA track cryptocurrency?

The CRA does not track cryptocurrency declaration. Because of this, the agency cannot determine how many Canadians are reporting crypto transactions on their taxes.

How is crypto taxed in Canada?

In Canada, cryptocurrency is taxed like other commodities. For example, you bought a cryptocurrency for $1,000 and sold it for $3,000. You need to report 50 percent of your capital gain of #2000. The reported amount ($1000) will be added to your income and taxed at your marginal tax rate.

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