CRA & Revenu Québec, Income & Investments, Savings & Investments, Self-Employed, Tips & Advice

Reporting Digital Currency Gains and Losses on your Canadian Personal Income Tax Return (T1)

Digital Currencies, or Crypto-Currencies have been around for a while, only recently gaining more attention as their value increases and more people begin to trade with them.

The most known of the digital currencies is the Bitcoin – which is one of many digital currencies which can be bought or traded online for goods or services.

These digital currencies are not produced by any country, nor are they considered legal tender in of any country, so as a result of their use in online exchanges allows for anonymous transactions which can not be easily tracked.

You can acquire Bitcoin in 3 ways:

  1. Through “mining” – a process in which you use computers to solve algorithms and ‘discover’ new coins
  2. By purchasing them through a Bitcoin exchange for traditional currency
  3. As a payment in exchange for services

As a result of their anonymity, many Crypto-Currency traders have refrained from reporting the income they have earned as the price of digital currencies skyrocketed.  Failing to report that income can pose a huge problem now that the digital currency market is bottoming out.

In Canada, the Canada Revenue Agency expects all Crypto-Currency transactions to be treated in the same manner as any commodity would, which means any increase in the price produces a Capital Gain (taxable at 50%), and any losses would create a Capital Loss.

For example, if you bought Bitcoin for $1000 and sold it for $3000 you would have made $2000 off your initial investment, which is your Capital Gain.  That Capital Gain would then be taxed at a tax rate of 50% ($2000 x 50% = $1000) and you would include the $1000 gain on your personal tax return as income.

If the reverse occurs and you purchase $3000 of a digital currency and sell it and only receive $1000, then you would report a Capital Loss of $1000 ($2000 x 50% = $1000) on your personal tax return and that amount could be used to reduce any taxes owing.

This, however, does not apply if you are considered a high volume trader. A high volume trader is someone who holds Crypto-Currency for a short period of time before trading them.  In most cases, the CRA will consider this an adventure in business meaning you’ll have to file your taxes as such.

If you don’t trade in digital currencies, but use them to buy goods, the CRA considers that transaction to be a barter transaction – the exchange of one good for another without the use of cash – which is taxable.

Please see our post on Barter Transactions for more information.

By law, you are required to keep records of your trades. If you didn’t keep records, you will need to make an educated guess on the values. This is important so you can keep track of your capital gains and capital losses.  Without supporting documentation, the CRA can over-assess you, or deny your losses.

Tax evasion is illegal.  If you fail to thoroughly, or accurately report it your gains and losses on Digital Currencies, you could at the very least be assessed interest and a 50% Gross Negligence Penalty, but at the worst, be charged with Tax Evasion.

You may think that you’re completely anonymous in these transactions, but your username and exchange records exist, and the Internal Revenue Service (IRS) south of the border, have already made progress through the courts in getting that information from an exchange.  It’s only a matter of time before those exchanges will be legally required to provide information to the IRS, the CRA and other taxation agencies around the world, so make sure that you include the gains and losses.

In the eyes of the CRA, the rules around the taxation of Crypto-Currencies are very clear, and reporting those gains and losses is the right thing to do and it’s what is in your best interest.