Income Tax Implications of Cryptocurrency in Canada
When do I need to report cryptocurrency or crypto activities?
All income has to be reported to the CRA on your annual personal tax return. If you have income from cryptocurrency, regardless of how that income is made, you’ll need to report it.
There is a misconception that cryptocurrency is "hidden" from the CRA. However, the CRA has spent the last several years expanding their ability to track down this type of income. The CRA is a member of the J5 (Joint Chiefs of Global Tax Enforcement) which is an international coalition aimed at tracking cryptocurrency-related tax evasion and money laundering. Digital wallet providers such as Coinbase have already been compelled by the courts to provide user information to tax agencies, and increasingly these companies have begun to voluntarily report to tax agencies on a regular basis.
The more important question with cryptocurrency income is not whether to report it (you have to!) but how to report it! Because cryptocurrency is treated as a commodity, not legal tender, in Canada, any transaction where cryptocurrency is used will have taxable consequences:
Selling cryptocurrency for legal tender: If you sell your cryptocurrency for more than you paid, the difference between your selling price and your original purchase price is income.
Trading cryptocurrency for a different cryptocurrency: This is considered a barter transaction, so both cryptocurrencies must be valued at the current fair value; if the one you receive is worth more than the one you traded, the difference in price is income.
Using cryptocurrency to buy goods and services: When you convert your cryptocurrency back into cash, if it happens to have gained value in the interim, that difference is income.
Accepting cryptocurrency as payment for goods and services: If the cryptocurrency you receive is worth more than the goods you sold, the difference in value is income.
Making a gift of cryptocurrency: This is considered a "deemed disposition" and must be valued at fair market value; if fair market value is higher than the original cost of your cryptocurrency, then you have a gain that is considered income.
What kind of income is it?
If you earn money by selling cryptocurrency, you’ll need to determine whether the income is capital gains or business income. If you report your cryptocurrency income as capital gains, you’ll need to be able to support that classification. The table below shows an estimate of the tax implications of a sale of cryptocurrency as a capital gain, versus as business income, and demonstrates why this distinction is so important.
In this example, we assume cryptocurrency with an original cost of $3,000 is sold for $7,000:
Indicators of business income
Regular or repetitive trades, purchases or sales of cryptocurrency
Holding crypto for short amounts of time before selling
Buying crypto with the intention of selling it quickly for a profit – even a single transaction like this can be considered business income
Mining cryptocurrency on a regular basis
Owning specialized equipment or building specialized infrastructure for mining crypto
Indicators of capital gains income
Holding cryptocurrency for long periods of time, similar to an investment portfolio
Bottom line: If you are mining cryptocurrency, or if you are buying and selling frequently in a manner similar to day-trading, the CRA will likely view your activity as a business, and your profit will be fully taxable.
Remember, though, that all expenses you incur (like mining hardware, special infrastructure upgrades like building a separate room, cooling equipment, internet and electricity) will be deductible against your business income. And if you have a business loss in the year, you can use that loss to reduce your income in other categories.