The plunges in bitcoin and other cryptocurrencies in recent weeks have been a harsh lesson for many trend-chasers. But as painful as those were, market losses aren’t the only thing they should be braced for. Daniel Ling, tax specialist at Crowe Soberman LLP, said the Canada Revenue Agency (CRA) would likely want to step in and take a hard look at your cryptocurrency.
In a recent note, Ling said that tax consequences can arise from cryptocurrencies depending on two critical questions: how they were acquired and the owner’s intentions in holding them.
In cases where cryptocurrencies are acquired through mining, the
CRA will have to determine whether the mining was done as part of a business or
simply as a hobby. There’s no definitive test or criteria, so at the moment the
CRA looks at the facts surrounding each case individually. In case the activity
is declared and deemed as a hobby, income would not be taxable when received
but would be taxable when disposed.
“At the moment, the CRA has not released the specifics on how and when the
revenues from mining businesses will be taxed,” Ling said, though he added that
those in the business of cryptocurrency mining would report their business’
details on Form T2125, Statement of Business or Professional Activities.
Just purchasing bitcoins or similar digital currencies would not lead to
immediate tax consequences. But when cryptocurrencies are accepted in exchange
for goods or services, barter transaction rules would apply; the CRA would tax
the party receiving the cryptocurrencies based on either the usual monetary
value of the good or service they delivered or, if that information’s not
available, the value of the cryptocurrencies they received. Ling noted that
since volatility in a cryptocurrency could make determining a sufficiently
accurate average price difficult, it is best to use the price at which a
purchase or sale has been settled at, or its value at the time the transaction
was executed.
In cases where cryptocurrencies are being traded, the CRA would also have to
make a judgment on whether they are being held as investments or inventory.
There are no definitive thresholds or tests, though the agency may take factors
such as the frequency of transactions, period of ownership, the owner’s knowledge
of the securities markets, and time spent into account.
When cryptocurrencies are regarded as investments, gains or losses would count
only when they have been disposed, usually through a sale or exchange. “Only
half the resulting gain or loss is included into income as a taxable capital
gain or an allowable capital loss, respectively,” Ling said.
“[Cryptocurrencies] are generally considered to be held as inventory and on
account of income when the course of conduct in trading or selling … resembles
a business,” he said. The inventory valuation method to account for the
cryptocurrencies has potential revenue consequences each year, with gains or
losses on disposed cryptocurrencies being treated as ordinary income and fully
taxable. Trading business information, as well as any reasonable expenses in
operating such a business, would be reported on Form T2125.
