Cryptocurrency prices have been making a comeback! This means many hodler’s who weathered the last crypto winter may be considering cashing out and are left wondering how their profits will be taxed. Is it business income or capital gain?
Tax Treatment of Cryptocurrency for Income Tax Purposes
The proceeds you receive from disposing of cryptocurrency may be considered business income or a capital gain. There is no clear-cut rule than defines one or the other. Whether this is business or capital income must be determined on a case-by-case basis.
Here are some signals that indicate business income:
- You are a day trader (check out our recent article on what factors are in play to determine day trader status).
- You mine cryptocurrency and intend to earn a profit, even if you are unlikely to do so in the short term.
- You operate a cryptocurrency business (including mining, trading, exchanges, and ATM’s).
What Triggers a Taxable Event?
- Exchanging one cryptocurrency for another (example: BTC to ETH)
- Selling cryptocurrency for fiat currency (example: BTC to CAD)
- Trading cryptocurrency to stablecoins (example: BTC to TUSD)
- Trading cryptocurrency for goods or services (example: purchasing a Tesla vehicle with bitcoin)
- Mining cryptocurrency (example: you operate a mining business and receive cryptocurrency, the value of the cryptocurrency on that date you earned it will be considered business income. If you mine as a hobby, your cost base is zero and when you sell the coin you will trigger a capital gain. You cannot claim any deductions under a hobby scenario.)
- Chain splits or forks (example: when BTC forked to bitcoin cash, if you operate as a hobbyist or investor, then you cost base for the new coin is zero and you will pay capital gains when disposing. If you operate as a business, it is considered business income when you receive the split.)
- Tax on ICOs (example: you receive a new token as an Initial Exchange Offering and purchased it with BTC or ETH. The value of the new coin will be the value in CAD of the BTC or ETH you used to purchase it. The taxable event is triggered on the day of the ICO transaction, when you get the tokens.)
Keeping Books and Records
Every cryptocurrency trader should be making keeping accurate books and records a priority. This means you should maintain records for the following:
- 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.
If you are a miner, also keep the following records:
- receipts for the purchase of cryptocurrency mining hardware.
- receipts to support your expenses and other records associated with the mining operation (such as power costs, mining pool fees, hardware specifications, maintenance costs, and hardware operation time).
- the mining pool details and records.
Amending Tax Reports for Previous Years
Other countries have taken a head start at cracking down on cryptocurrency taxes. It is only a matter of time before Canada starts to do this too. If you have not filed your taxes correctly in the past, be proactive and amend your prior year returns to reflect cryptocurrency transactions. You may have significant gains where you have tax to pay, or you may have experienced pain and can claim losses. Either way, reporting your taxes accurately is most important.
Contact Argento CPA today and we will relieve your accounting pains from reporting your gains on your cryptocurrency tax situation!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.