The Canada Revenue Agency (CRA) has identified that cryptocurrency such as Bitcoin, Ethereum, Solona, and Ripple (XRP) are taxable assets. The technology behind cryptocurrency is the blockchain. The blockchain includes a permanent indelible ledger which records and stores records of all cryptocurrency transactions. This replaces the need for a financial institution to validate transactions. This is why many cryptocurrencies are generally referred to as peer-to-peer systems.
As more individuals and business adopt cryptocurrencies, the need for clear tax guidelines have become more apparent. While legislation and case law have not yet distilled Canadian taxation guidelines, there are several key ways in which taxpayers can protect themselves in order to minimize tax problems.
Why Keep Records?
Our top Canadian crypto tax lawyers’ stress that one of the most important ways to protect yourself from Canada Revenue Agency (CRA) tax audit problems is to keep a record of all aspects of your cryptocurrency transaction history. Because trading, selling, and mining cryptocurrency coins and tokens have significant tax consequences, keeping detailed records is essential in any dealings with the CRA. For example, one key area of dispute between the CRA and individual taxpayers concerns whether a particular transaction is considered a capital gain or business income. Because of the capital gain inclusion rate – only half of capital gains are taxable – if there is a gain, it is likely tax advantageous for the taxpayer to report the gain as a capital gain rather than business income. It is also tax advantageous to report losses as business losses because they can be fully utilized to reduce your overall taxable income. On the other hand, only half of capital losses (just like capital gains) are included as taxable capital losses.
In a dispute about whether a particular transaction should be reported as a capital gain or business income, evidence is used to determine the outcome. Without proper record keeping, it will be significantly more challenging to prove that your interpretation is correct, and the CRA may disallow your characterization to your detriment. This could potentially force the taxpayer to pay a larger tax amount than is required. Had the taxpayer kept detailed records, this would not be the case.
Because multiple transactions may be necessary to purchase or sell a crypto coin, the number of transactions can create the appearance of artificially increasing the volume of trades. Because of this, detailed records indicating the purpose of each transaction is important to provide an accurate picture of the nature and purpose of all trades.
For cryptocurrency, keeping records is especially critical because of the unclear characterization and regulatory circumstances surrounding cryptocurrencies. For example, in 2020, the US Securities and Exchange Commission, commonly referred to as the SEC, filed a complaint against CEO, Brad Garlinghouse and Chair, Christian Larsen of Ripple Labs. The filing argued that XRP, the cryptocurrency created by Ripple Labs, was a security rather than a commodity. This distinction has significant regulatory and potentially taxation consequences for investors of the cryptocurrency. Because of the inchoate nature of cryptocurrency and therefore regulation, keeping in-depth records is a key protection for traders, miners, and stakers.
Recently, the CRA provided a long list of important details that a person trading cryptocurrency should keep. For cryptocurrency traders, the CRA has outlined that it is essential to record:
- the date of the transaction
- the cryptocurrency addresses
- the Transaction ID
- receipts for the purchase or transfer of cryptocurrency
- value of the cryptocurrency in Canadian dollars at the time of the transaction
- a description of the transaction
- exchange and wallet records
- accounting and legal costs
- fees incurred to trade the cryptocurrency
- software costs related to managing you tax affairs\
It is important to note that this list is not comprehensive. Moreover, for individual “hobby” traders, the list of important records to keep is likely shorter than for professional miners or those who trade cryptocurrency as their primary business.
For those who mine cryptocurrency, it is also essential to keep records of:
- receipts for purchasing cryptocurrency mining hardware
- receipts to support your expenses associated with the mining operation
- the mining pool contracts and records
- any other records on the mining activities
- the disposal of cryptocurrency earned through the mining activities
For those who use cryptocurrency as a medium of exchange, the first list applies. The CRA has characterized Bitcoin and other cryptocurrencies (such as Ethereum and XRP) as a commodity for medium of exchange purpose. This means that the purchase of sale of goods and services using Ethereum, for example, is considered a “barter transaction”. In a barter transaction, the cost and sale price of the goods or services is the value of the goods and services, in Canadian dollars. So, if a kilogram of apples is normally worth $4.00, and one “Applecoin” is used as a medium of exchange to purchase the kilogram of apples, the cost and sale price is $4.00. In the case of a barter transaction, such as purchasing a good or service, it is likely that sales taxes such as GST, HST, PST, or QST may apply. These too, must be recorded, and for the service provider, remitted and paid to the government.
Section 230 of Canada’s Income Tax Act
Section 230 of the Income Tax Act imposes a requirement on Canadian taxpayers to keep adequate books and records. Thillis record-keeping requirement applies to all persons who are required to pay tax or collect income tax and includes those who are not Canadian tax residents but carry on a business in Canada. Section 230 requires that the books and records be sufficient to determine the amount of income tax payable. The records and books must be kept at the persons residence or place of business.
Another important reason to keep records of your cryptocurrency is the foreign property requirement. Taxpayers who own more than CAD$100,000 in specified foreign property has an obligation to fill out a Form T1135. In April 2015, the CRA took the position that cryptocurrency such as Bitcoin, Ethereum, Solona, and Polkadot constitute “funds or intangible property”. As a result, if the cryptocurrency is held, situated, or deposited outside of Canada (and not use or held in the course of carrying on a business), it is considered specified foreign property. Hence, if Canadian tax resident has cryptocurrency with a cost base at $100,000 or above, they are required to report it on the T1135 Form. It is important to note that the $100,000 is an aggregate value. So, if the taxpayer holds foreign real estate worth $95,000 and cryptocurrency with a cost of $5,000, that is sufficient to trigger the mandatory reporting requirement.
Pro Tax Tip:
Section 230 requires you to keep sufficient books and records for a minimum period of six years. So, if you sold Bitcoin in 2022, you are obligated to keep the records, books, and supporting documentation until 2028. Failure to do so may lead to a criminal offence under Section 238 of the Income Tax Act. Contact our expert Canadian crypto tax lawyers to advise you about the requirements for keeping sufficient books and records and whether your transactions should be reported as capital gains or business income.
- Do I have to keep records of all cryptocurrency transactions?
Yes, failure to do so may result in a criminal offense under Section 238. Not to keep records may put you at the mercy of the CRA, who have broad powers to reassess your tax owing. Without detailed records, the taxpayer has inadequate means of demonstrating the correct tax owing.
- If I use a US-based crypto wallet such as Coinbase, do I have to report my cryptocurrency holdings?
If you have over $100,000 of specified foreign property, then you are obligated to disclose those assets using the T1135 Form. If you fail to do so, you may incur a penalty of $25 per day up to a maximum of $2500. There may be additional penalties if the failure to file was done knowingly or in circumstance amounting to gross negligence.
- How do I know which records and documents are relevant for my taxes?
For tax reporting purposes, record-keeping is critical when it comes to cryptocurrency. Failing to understand which records, books, or supporting documents are relevant for tax purposes may create more tax liability than if you have the proper documentation. Our Canadian crypto tax lawyers have assisted numerous taxpayers with their cryptocurrency questions. To know more about cryptocurrency record-keeping, consult with a Toronto tax lawyer by calling Rotfleisch & Samulovitch PC today at 647-699-4314, or email us at firstname.lastname@example.org.
“This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a Canadian tax lawyer.”
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."