With the price of bitcoin spiking in 2017, cryptocurrencies are gaining traction and moving into the spotlight of currency trading. If you jumped on the bandwagon and sold cryptocurrency (such as bitcoin or ether) in 2017, or made a purchase using cryptocurrency, you’ll need to report those capital gains on your tax return.
What are capital gains?
Capital gains are profits realized from the sale of capital property, such as investments and securities. These gains are calculated by taking the difference between the selling price of the property and its cost (referred to as the “adjusted cost base” or ACB).
Since cryptocurrencies can be bought or sold like a commodity, they are considered a security, and taxpayers will be taxed on those capital gains.
What if I sold my bitcoin to buy ether? Does that count?
Yes. The Canada Revenue Agency (CRA) considers cryptocurrency transactions to be a type of barter transaction, so anything that is bought or sold using cryptocurrency is not only taxable (as income or a capital gain), but may also require you to collect or pay GST/HST on the transaction. Because the trade of cryptocurrencies is considered part of a barter transaction, you will still need to report your gains when trading cryptocurrencies.
So, if you purchased anything (including other cryptocurrencies, such as bitcoin or ether) using cryptocurrency, the CRA’s position is that you sold that cryptocurrency for its value in Canadian dollars at the time of the transaction.
What if I lost money when I sold my cryptocurrency?
As with reporting capital gains on profits you earned from selling or using your cryptocurrency, you may report any capital losses that occurred during these transactions.
My computer earns bitcoin from mining. Do I need to report that?
When you join a cryptocurrency network, you are using your computer to create or “mine” new bitcoins (and other cryptocurrencies) by solving complex mathematical equations and validating cryptocurrency transactions. And supporting a global cryptocurrency network requires the power and energy of countless computers. As compensation, those who join a network to mine cryptocurrency as a business are paid in cryptocurrency.
In this situation, income from mining cryptocurrency is considered taxable, since cryptocurrency mining is considered a business activity. However, companies and individuals who mine cryptocurrency, may be able to write-off a portion of incurred business expenses.
While this scenario is rare, it should be obvious that individuals who earn salary and wages in cryptocurrency have to report that income on their tax returns. Independent contractors will also need to collect GST/HST on goods and services paid for with cryptocurrency; as with companies, they may still deduct incurred expenses and claim relevant tax credits.
Since the CRA has only taken a position on cryptocurrency in recent years, there may still be a lot of confusion for taxpayers. Consult a chartered professional accountant to find out how to report your cryptocurrency transactions on your income tax return.
Bilal Kathrada, CPA, CA, is a partner at Clearline Chartered Professional Accountants specializing in income tax and succession planning for Canadian owner-managed businesses in various industries. Bilal is a volunteer of the CPABC Taxation Forum and CPABC’s media expert on RRSPs and income tax filings.