Cryptocurrencies (digital currency based on blockchain technology) have been the talk of the town over the past couple of years and have gauged mainstream interests. You might have heard of Bitcoin, Ethereum, Litecoin, Ripple, Monero, Dash, and hundreds of other currencies.
What are Cryptocurrencies?
These currencies can be bought and sold either privately or through public cryptocurrency exchanges. They can also be used as tender for the purchase of goods and services. In Canada, however, cryptocurrencies are not considered “legal tender” as defined under the Currency Act. To be considered legal tender, a currency must be bank notes issued by the Bank of Canada under the Bank of Canada Act or coins issued under the Royal Canadian Mint Act. Cryptocurrencies are not managed or controlled by a central authority like a financial institution or government.
How Does CRA Treat Cryptocurrencies?
The CRA views cryptocurrencies as a commodity rather than currency. Therefore certain rules under the Income Tax Act that would normally apply to currencies and foreign currencies (eg. subsections 39(1.1) and 39(2)), do not apply to cryptocurrencies. Rather, the rules applicable to transactions in securities would be used to determine whether the income is on account of income or capital. See our previous article on trading securities for some guidance on this. Generally speaking, if you are day trading cryptocurrencies, the gains/losses on the sale of cryptocurrencies will likely be on account of income (fully taxable). If you are buying and holding cryptocurrencies as part of a portfolio with a longer term outlook for the technology, any gains/losses on the future sale could be subject to capital treatment (50% is taxable). Of course, as noted in our last article, this is a complex area of analysis and professional advice should be sought out.
When Do Bartering Rules Apply?
When cryptocurrencies are used to pay for goods or services, the rules for barter transactions apply. Bartering is the trading of one commodity for another by two or more parties. A barter transaction can result in income/expenses or can result in the acquisition or disposition of capital property, personal property, or inventory. As an example, if you provide a service that you would normally provide in the course of earning income to someone in exchange for cryptocurrency, you would be required to recognize the service provided as income. If you pay for goods or services with cryptocurrency, there would be disposition of cryptocurrency, which would result in a capital gain or loss.
What Should I Do?
Generally, you will want to track the price (in Canadian dollars) that you paid for your cryptocurrency. Many crypto exchanges allow you to exchange one cryptocurrency for another. The exchange would create a taxable event as you are disposing of one cryptocurrency to buy another. The tracking, however, of the transaction amount in Canadian dollars is usually deficient or not available, therefore it’s imperative that you record the Canadian dollar equivalent of the cryptocurrencies that you are exchanging when it happens.
Further Help:
You can read more about cryptocurrencies and the risks/precautions here:
https://www.canada.ca/en/financial-consumer-agency/services/payment/digital-currency.html