Do You Need To Report Crypto Income to the CRA?
James Bell, Director of Farber Tax Solutions and Boris Stanislav, Tax Lawyer with Farber Tax Law went over and answered questions on how the COVID-19 situation could affect your tax filing and tax debt owing.
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CRA Taxes on Bitcoin Income
Bitcoin prices surged towards the end of 2017, leading many Canadians to invest in this and other cryptocurrencies. However, now that tax time is approaching, you may be wondering how cryptocurrency is taxed in Canada and whether or not you need to pay taxes on cryptocurrency income.
While digital currencies such as bitcoin are not legal tender in Canada, using digital currency does not exempt you from Canadian tax obligations.
Cryptocurrencies are viewed as a commodity in Canada. This means that any gains or losses made from buying and selling bitcoin or other cryptocurrencies are considered taxable income.
However, you are only taxed when the cryptocurrency is used in the real world, such as when you sell it or use it to purchase something. If you purchased bitcoin and haven’t touched it since, you won’t owe any taxes at this point. But you’ll still want to track your bitcoin transactions for when you do use the cryptocurrency.
Taxes on Buying and Selling Bitcoin
Cryptocurrencies are taxed just like any other investment. This means that 50% of the gains are added to your income for the year and taxed. For instance, if you bought one bitcoin when it was valued at $10,000 and sold when it was valued at $15,000, that is a $5000 gain. So, 50% of that amount ($2500) would be added to your annual income and taxed.
If you used bitcoin to purchase another type of cryptocurrency, such as Ethereum or Ripple, this would be considered the same as you having sold the bitcoin at the time of the transaction. This means you would need to declare the value of the bitcoin sold in Canadian dollars at the time of the transaction on your income taxes.
Keep in mind that any fees associated with buying the cryptocurrency can be used to reduce the gains.
If You Actively Trade Bitcoin
If the Canada Revenue Agency (CRA) considers your cryptocurrency activities to be a business, then you will need to file your taxes accordingly. For instance, you may be considered to be operating a business if you frequently make cryptocurrency trades, trade at a high volume, or day trade cryptocurrencies.
Taxes on Purchases Made in Bitcoin
Several vendors now accept bitcoin and other cryptocurrencies as payment for goods and services.
If you purchased bitcoin or any other cryptocurrency, and then used that cryptocurrency to make a purchase, you are responsible for keeping track of these transactions. Since cryptocurrencies are considered commodities, transactions involving them are covered under the portion of the tax code that governs barter and trade transactions.
This can get complicated as you will need to track the amount of cryptocurrency that you own, how much you paid for it, and the value of the goods or services that you received for it. For instance, if you spent $5000 to purchase an amount of bitcoin, waited until the value of that bitcoin reached $15,000, and then used it to purchase a vehicle valued at $15,000, you must report a gain of $10,000. This record keeping process can become quite complex if you purchased bitcoin at several different times and at several different prices.
If you operate a business and accept cryptocurrency as payment, you will need to report any sales made in cryptocurrency on your tax return in Canadian dollars in the same way you would report any other profits or income.
Canadian Taxes on Mining Cryptocurrency
If you are mining bitcoin or another cryptocurrency, the gains associated with these activities must be reported as income as well. If you are doing so as a business, you may be able to deduct business expenses such as the cost of the computers and the electricity used.
The Consequences of Not Reporting Cryptocurrency Income to the CRA
If you do not report cryptocurrency income to the CRA, the agency will consider this to be the same as not reporting any other type of income. This means that you will be breaking the law and the CRA will consider it tax evasion.
When the CRA finds out (and since bitcoin and other cryptocurrencies are very popular right now, you can be assured that the agency will be looking) you we be subject to a fine. The fine for tax evasion in Canada can be up to double the amount of the tax that was sought to be evaded and even potential imprisonment. It’s important to note that the CRA is more interested in the money owed to it than it is in sending anyone to jail. However, in addition to any tax evasion fines you may be ordered to pay, you will also be charged interest and penalties on the amount of your outstanding tax debt.
If you have income from bitcoin or other cryptocurrencies that you have not declared to the CRA, it is a good idea to speak to a tax professional right away. Contact us to discuss your tax situation and find out how we can help.
Farber Tax Solutions can help you successfully deal with CRA problems. We utilize the experience of our ex-CRA professionals to:
- 1| Offer a comprehensive solution that is focused on achieving the most favourable possible outcome for your tax issue
- 2| Communicate with the CRA on your behalf and navigate the entire CRA dispute processes
- 3| Offer a complete solution to tax problems, including ex-CRA professionals, lawyers, and experienced accountants