So you’ve gone ahead and made some money trading Bitcoin (lucky you, most of my friends lost a ton). But now what? Do you report this on your tax return? And if so, how?
Bitcoin, and any other digital currency (DC) for that matter, can be a tricky subject when it comes to taxation. There are several considerations such as the following:
- Personal transactions involving Bitcoin and DC
- Trading in and speculating in Bitcoin and DC
- Commercial transactions involving Bitcoin and DC
- HST implications involving Bitcoin and DC
This blog post will concentrate only on subject number 2: trading in and speculating in DC.
The Canada Revenue Agency (CRA) treats trading and speculating in DC as a commodity type transaction for income tax purposes. This means that the purchase of DC sets a cost base and the disposition of a DC in exchange for money, anther type of DC, or a consumer good would set a “sell” value. The difference between your cost base and your disposition price (denominated in Canadian dollars less any costs to sell) will equate to either a gain or loss for tax purposes. This is the easy part, the hard part is determining whether that gain is on account of capital (i.e. capital gain or loss) or regular income.
Capital gains in Canada are taxed at half the normal marginal tax rate whereas regular income is taxed at the full marginal tax rate. Conversely, Capital losses are deductible at only half the normal rate whereas regular losses are fully deductible. Capital losses are only applicable to offset capital gains, regular losses can be used to offset any type of income.
How do you know if your gains and losses on DC transactions are capital in nature or on account of income?
The CRA will consider a variety of factors in making their determination including (but not limited to):
- your intentions
- the nature and frequency of your transactions
- the period of ownership of the DC
- your expertise and knowledge of cryptocurrencies
- the relationship, if any, between the cryptocurrency transactions and your ordinary business (i.e. are you mining DC?)
- the amount of time you spend on trading DC
- the type of financing that you use to support your trading in DC
- whether you advertised or otherwise made it known that you are engaged in this activity
So for example, if you are a DC internet content expert who regularly blogs about the subject and consults to the public on DC matters and you make intra-day trades on your DC account with the clear intention to profit from your trades it will be safe to say that your gains and losses are on account of income and the gains (net of your losses) will be fully taxable.
If instead, you made one purchase transaction in DC a few years ago and have recently decided to cash out, you have no idea what blockchain is, you never intend to purchase DC again and the word “mining” triggers thoughts of physically digging into the ground rather than a network of servers then you’ll probably get away with claiming a capital gain and paying tax at half the normal rate.
Never-the-less you need to report this on your personal or corporate tax return because not reporting income from DC transactions is clearly illegal. In addition, if your investment (at cost basis) in DC exceeds $100,000 Canadian dollars and the DC you bought is situated outside of Canada you MUST file form T1135 Foreign Income Verification Statement or you will be subject to some pretty strict penalties.
Digital Currency is an emerging concept that entrepreneurial-minded investors and small business owners are beginning to consider. However, the technology is still in its infancy and the taxation of DC transactions is not yet clear-cut.
At Campanella McDonald LLP we help small business owners, self-employed professionals, and affluent investors maximize their bottom lines by providing value-added tax, accounting and financial advice. Our partners and staff have been advising clients since 2002 on a variety of alternative investments including hedge funds, private equity investments, digital currency and real estate. For more information email us at firstname.lastname@example.org, or call 289-817-0097 ext: 101.