Digital Currencies, or Crypto-Currencies, only recently gained 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, at the time of this publication it is illegal in 6 countries; China, Nepal, Bolivia, Algeria,Egypt & Morocco. There are semi bans in other countries, including Canada.
The government states that if you are in the virtual currency industry, you must register with the Financial Transactions and Reports Analysis Centre of Canada (Fintrac) for any bank or financial institution to allow you to open or or maintain an account using crypto-currency. While El Salvador is the first country to adopt it as legal tender.
Government of Canada
Do your homework before buying and trading crypto-currencies, as there are many to choose from. A few questions to ask a reputable provider is – “What is the “exact” process of collecting my currency and translating it into cash? & What extra fees will I have to pay to do this, if any?” If these organizations are legitimate they will have no issues explaining a transparent procedure. Request it in writing as well and include this in your records. Be vigilant when handing out your hard earned cash, just like any other commodity purchase.
Top 25 Cryptocurrency Providers (at the time of publication of this article):
Bitcoin Etherium BinanceCoin Tether Cardano Solana XRP HEX Polkadot Dogecoin SHIBA INU USDCoin Terra
Algorand BitcoinCash Cosmos VeChain Stellar Fantom Axielnfinity Litecoin MaticNetwork Chainlink Avalanche Uniswap
You can acquire virtual currency in 3 ways:
- Through “mining” – a process in which you use computers to solve algorithms and ‘discover’ new coins
- By purchasing them through a crypto-currency exchange for traditional currency
- As a payment in exchange for services
As a result of their anonymity, many Cryptocurrency 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, with the trading market becoming so popular and all governing agencies worldwide taking notice to avoid potential revenue losses.
In Canada, the CRA 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 a $2000 profit 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) which would apply a $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 Cryptocurrency 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.
For Quebec residents, please review the following link from Revenu Quebec for details on how to claim this virtual currency on your provincial return (TP-1).
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 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.
So make sure that you include the gains and losses on your tax return.
In the eyes of the CRA, the rules around the taxation of Crypto-Currencies are very clear, and reporting those gains and losses is in your best interest to avoid any possible issues down the line.