Crypto Taxes and Accounting

The Ultimate Guide To Canadian Crypto Tax Laws For 2021

Published
October 8, 2021
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    In Canada, cryptocurrency is not considered legal tender. The only legal tender in Canada is the currency (banknotes and coins) that is issued by the Royal Canadian Mint Act and the Bank of Canada. This implies that neither the Canadian government nor any central authority supports the virtual currency. 

    So if these central authorities do not consider crypto as a currency, what is the status of cryptocurrency in Canada? And are there any Canadian crypto laws? To answer these questions we need to explore the status of cryptocurrency in Canada.

    Status Of Cryptocurrency In Canada

    Fulfilling the purpose of the Income Tax Act, the Canada Revenue Agency (CRA) considers cryptocurrency a commodity. The CRA established a cryptocurrency section in 2017 to guarantee that Canadians who invest in cryptocurrencies pay their fair share of taxes. It also conducts crypto audits for tax purposes.

    Depending on the conditions, any revenue earned from Bitcoin transactions is generally categorized as either business income or capital gain. Profits are classified as either business income or capital gains, while losses are classified as either business losses or capital losses.

    Business Income Or Capital Gains

    Before understanding business income or capital gains, we must learn what disposition is.

    So, what is a disposition?

    The process of selling, disposing, and donating crypto assets is known as disposition. In most cases, holding cryptocurrency isn’t considered taxable, but the following cases are an exception:

    • Selling or gifting cryptocurrency
    • Trading or exchanging cryptocurrency (from one crypto to another)
    • Conversion of crypto to fiat currency (e.g., Bitcoin to Canadian dollars)
    • Buying goods and services using cryptocurrencies

    Now that we know which crypto events are taxable, we must understand if the gain is categorized as business income or a capital gain? You can derive this by determining the kind of income you have. The following are the four indicators that you’re operating a business:

    1. Operating in a commercial manner
    2. Developing company plan and collecting capital assets or inventory
    3. Publicizing products and services
    4. Plan to generate profit 

    For example, some cryptocurrency businesses are cryptocurrency trading, cryptocurrency mining, and cryptocurrency exchanging.

    Reporting Income And Capital Gains

    When you’re selling or disposing of crypto assets as a part of your business, your gains will qualify as business revenue and not capital gains. Buying crypto with the motive of selling it for a profit may qualify as business revenue since it might be deemed commerce.

    Trading Crypto For Another

    The barter transaction rules apply in most cases while disposing of crypto and purchasing others. The value of crypto that you receive has to be converted to the respective fiat currency, in this case, Canadian dollars. The transaction is termed as disposal and has to be recorded on tax returns. The profit or loss that is reported is categorized as commercial profit or capital profit (or loss).

    Mining Cryptocurrencies

    In Canada, crypto law states that mining cryptocurrency is also considered taxable, but it depends on a few factors.

    Cryptocurrencies can be obtained in one of the two ways:

    1. Buying through crypto exchange
    2. Earning through mining

    Mining is the process of solving complex mathematical problems with specialized computers to verify crypto transactions. Cryptocurrency transactions will be included in blocks, and miners will try to estimate a number that will result in a legitimate block in a public ledger called a blockchain. A miner will receive a reward for successfully verifying a block.

    The tax implications of mining cryptocurrency in Canada are similar to that of the United States and are dependent on whether the mining operation is a personal hobby or a commercial activity.

    Hobby miners’ rewards are not for business, but solely for entertainment. On the other hand, commercial miners generate sufficient profits and are taxed accordingly.

    Crypto As Capital Gain Or Inventory

    When crypto is considered as inventory, you can adopt one of the two techniques for valuing inventory that is constant from year to year:

    • Cost when acquired or fair market value—consider the lower one
    • The fair market value of inventory at the end of the year

    Keeping Records

    Whatever crypto transaction you make, it is recommended that you preserve a record of the cryptos you acquire. A lot of crypto software helps you with this record keeping as this might be a rather complicated task. Apart from the crypto you acquire, you must also keep a record of your supporting documents for at least six years.

    If you’re involved in buying and selling crypto, you must keep a record of the following:

    • Transaction date
    • Buy or transfer receipt
    • Value of the crypto in fiat (Canadian dollar) during purchase or transfer
    • Record and address of the crypto wallet
    • Transaction description 
    • Additional costs involved

    If you’re involved in crypto mining, you must keep a record of the following:

    • Mining hardware receipt
    • Additional expenses such as electricity, mining pool fees, maintenance cost, etc.
    • Record of the mining pool and record

    GST/HST

    GST/HST is applied whenever a taxable product/ service is being traded. It is calculated on the crypto’s FMV or the fair market value when the transaction took place.

    The Bottom Line

    Anyone who has or wants to acquire bitcoin needs to understand how the Canadian government regulates cryptocurrencies as securities. It provides some extra peace of mind knowing that firms who provide bitcoin are held accountable.

    ZenLedger easily calculates your crypto taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!

    Canadian Crypto Tax Laws FAQs

    1. Is crypto taxable in Canada?

    The Canada Revenue Agency established a cryptocurrency section in 2017 to guarantee that Canadians who invest in cryptocurrencies pay their fair share of taxes. It also conducts crypto audits for tax purposes.

    2. How do I know if my crypto gains are business gains?

    The following are the four indicators that you’re operating a business:
  1. Operating in a commercial manner
  2. Developing company plan and collecting capital assets or inventory
  3. Publicizing products and services
  4. Plan to generate profit
  5. 3. What is a disposition?

    The process of selling, disposing, and donating crypto assets is known as disposition.

    Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

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