As you know, it is time to start preparing for the filing of your 2021 personal income tax returns. For some of you, this tax season may look different for one specific reason: cryptocurrencies.
Given that cryptocurrency adoption increased exponentially over the last year, we wanted to reach out to those of you with cryptocurrency income to provide some guidance.
Please note that as of February 2022, in-depth guidance has yet to be provided by CRA on many forms of cryptocurrency transactions. Understanding this, CRA’s stance on the tax treatment of cryptocurrency transactions may evolve over time.
General Cryptocurrency Trading
In general, cryptocurrency trading can be considered either a source of business income or capital investment depending on your situation. CRA has yet to provide clear situational guidelines on where the line between capital investment & business income treatment of cryptocurrency lies. When considering the appropriate treatment, the following factors should be considered:
- Whether your primary intention is to profit on cryptocurrencies through trading
- Your ability & intention to profit from cryptocurrencies through means other than trading
- The duration cryptocurrencies are held before trading
- The volume & frequency of your transactions
- The time spent engaged in cryptocurrency activities
- Any financing used to support your cryptocurrency activities
- Any relationship between your cryptocurrency transactions and ordinary business
- The proportion of your cryptocurrency income to your total annual income
- You purchased several cryptocurrencies on a centralized exchange like Binance. Throughout the year, you regularly swapped them for other cryptocurrencies earning significant profit on their relative increases and decreases in value without taking them off exchange. CRA may consider this a source of business income since your primary intention was to sell cryptocurrencies for profit through frequent trading over the year.
- You purchased cryptocurrencies such as Polkadot or Atom on Binance and then transferred them to a private wallet to stake them and earn additional tokens. To sell these tokens, they would need to be un-staked which requires a 14-28 day un-bonding period. CRA may consider your cryptocurrency to be a capital investment since it cannot be sold immediately if it suddenly increases in value, demonstrating a commitment to profit primarily by accumulating staking rewards.
Other things to consider with respect to cryptocurrency trading:
- Many Investors frequently swap cryptocurrencies for other cryptocurrencies. It is important to note that swapping one cryptocurrency for another is considered a taxable sale as if they were sold for cash and reinvested.
- If cryptocurrencies are exchanged for goods/services, it is considered a taxable event as if they were sold for cash and then used to pay for those goods/services.
Please contact us if you need assistance in assessing the appropriate treatment for your cryptocurrency trading income.
Cryptocurrency Mining Income
Like trading, the tax treatment of mining cryptocurrencies can be treated as either a source of business income or a capital investment. This treatment depends on your intention to mine cryptocurrencies for profit like a business venture, or if you mine for enjoyment as a hobby.
When assessing your situation, we would generally consider your investment in mining hardware and total income earned. Additionally, we would also consider many of the factors with cryptocurrency trading.
If considered a business activity, cryptocurrencies are taxed as income when initially mined and then treated as inventory. Once the cryptocurrencies are removed from inventory via a sale or transfer, further taxable income or losses will be reportable. Deductions can be made against business income for items such as: hardware purchased to mine cryptocurrencies, maintenance costs, electricity, and other costs related to the mining operation.
If considered a hobby, cryptocurrencies are not taxed when mined, but are taxed as a capital gain when sold.
- You purchased several retail graphics cards to build an Ethereum miner earning $20 CAD equivalent per day. CRA may consider this to be a venture undertaken in a business-like manner since hardware was purchase for the purpose of generating cryptocurrency income.
- You purchased a high-end PC to play video games in 2020 and learned it could be used to mine cryptocurrencies in 2021. You then installed a program that rents your computing power to a mining pool when idle, earning you an equivalent of $5 CAD per day. CRA may consider this hobby mining since your primary intention when purchasing the hardware was personal enjoyment and it is used to mine only when it would otherwise be idle.
Some cryptocurrencies can be staked to passively earn additional cryptocurrency. CRA has not provided any guidance on this activity but, as with mining cryptocurrencies, the receipt of additional cryptocurrencies through staking is likely to be considered a source of taxable income.
Other Cryptocurrency Income Sources & Decentralized Finance
Due to the emerging nature of the cryptocurrency industry, there are many other types of transactions that are likely taxable which CRA has not provided any guidance on proper treatment. Please consult us if you require guidance on any of the following activities:
- Liquidity Pool rewards
- NFT purchases/sales
- Loss of cryptocurrencies through theft or loss of keys
- Cryptocurrency lending
Foreign Reporting (T1135)
Generally speaking, CRA considers cryptocurrencies to be foreign assets. For which, a T1135 (foreign income verification statement) filing may be required if the total cost of your foreign assets, cryptocurrency & other, exceeds $100,000 (CAD).
If any of the above situations apply to you, we recommend reaching out to our team at Lohn Caulder to discuss the proper treatment & reporting of your cryptocurrency income.
Additionally, if you utilize decentralized finance applications beyond centralized exchanges, please be sure to let us know prior to submitting your tax documents.
Joseph Gonsky – Jgonsky@lohncaulder.com
Torin Lynskey –Tlynskey@lohncaulder.com