Although it's been around for 15 years cryptocurrency is more present and popular than ever. Even with its popularity, especially over the pandemic, very few Canadians understand when and how they have to pay tax on it.
Keep in mind that cryptocurrency is still like the wild wild west for CRA. Yes, they do have regulations and rules for when you need to report it and how it impacts your tax return, however, a lot of areas within the crypto ecosystem still lack hard CRA guidelines, like staking and mining.
It's important to note that just buying and holding cryptocurrency in a digital wallet is not taxable. A taxable transaction must take place which is then reported to CRA on your tax return.
That being said these are 4 types of taxable transactions that must be reported on your tax return. They are:
1. A sale or gift of cryptocurrency
Just like other capital assets (like stocks, bonds, ETFs etc.) anytime you sell your cryptocurrency or gift it to someone else you must declare that sale to CRA on your tax return.
2. Converting one type of cryptocurrency to another
Sometimes people ask me, "If I sell one asset but then immediately buy another asset with the proceeds can I avoid paying the taxes on my gain?" Unfortunately, this is not possible. Each time you sell one digital currency and buy another one you have to declare the sale to CRA. Even though we are dealing with the same type of asset (cryptocurrency) this is the equivalent of selling Apple shares to buy Tesla shares. You must always declare the sale to CRA on your tax return.
3. Converting cryptocurrency to a government currency (CAD, USD etc.)
Similar to converting one type of crypto to another, when you convert cryptocurrency into a government currency you are effectively selling your 'shares' of that cryptocurrency. This sale must be reported to CRA on your tax return.
4. Purchasing something with your cryptocurrency
Lastly, when you use your crypto to buy something you are selling it at market value. That sale must be reported to CRA on your tax return.
An easy way I tell my clients to remember this is, that anytime cryptocurrency leaves your digital wallet or you convert one type of crypto into another it is a taxable event and you have to report it on your tax return.
✨A note about staking and mining:
There is nuance to both of these areas when it comes to taxation and CRA currently lacks hard rules for reporting this.
Mining
Mining can either be considered a hobby or business activity on a case-by-case basis.
The difference lies in how you answer these 2 questions:
Are the activities conducted in a business-like fashion?
Is there a reasonable expectation of profit?
For example: If you have one miner that is occasionally plugged in this would be considered a hobby. If you had a business plan, multiple miners, etc., this would likely be considered business activity.
If you are considered to have a hobby business (not conducted in a business-like fashion and no reasonable expectation of profit) any income you receive is NOT taxable.
If your mining is considered to be a business activity you must declare the income you earn as business income on your tax return.
Staking
There are NO CRA guidelines when it comes to staking. There are two schools of thought when it comes to reporting staking income on your taxes.
1. Since there are no guidelines when it comes to staking most often people will not report this on their tax return.
2. For those individuals who are more cautious they can treat their staking income similarly to how mining income is treated. Similar to mining, staking can be considered a hobby or business activity. Depending on that outcome will determine how you claim it on your tax return.
When it comes to determining if your mining and staking income is taxable it may help to also consider your intent. Is your intent to earn income & run a side business or is your intent to casually play around with staking and mining?
Next month I'll tell you how to track and claim your cryptocurrency on your tax return. Let me know your questions in the comments.
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