We love bitcoin! We hate doing taxes! They’re confusing! And yet! We have to! Dumb!
That’s it, that’s the lede. We’re getting right into it because the Mogo blog is a *~ zero-pretension-zone~*. Today’s sad tax lesson: crypto taxes. #UGH
If you make money on selling, giving, or transferring crypto (this includes just buying and selling!), you’re gonna have to tell the CRA. Stick with us and we’ll unpack a few of the funny rules around cryptocurrency taxation.
Is Cryptocurrency Taxable?
Generally, yep! Crypto earnings are taxed, though they are handled differently than normal income.
In short, any “gains” you make from owning (or “possessing,” as the CRA calls it) crypto are taxable, but not all gains are treated the same way in the course of taxation. Generally, gains are treated as business income, or as a capital gain (again, distinct from your normal income from your job or whatevs).
A capital gain is income earned on the sale of an asset which has increased in value since you first purchased that asset. Bitcoin is itself an excellent example here: if you own BTC, the price goes up, and you sell, the money you made above your initial investment is considered a capital gain. Business income is money earned in the course of business. The CRA is kind of flaky and wily around what constitutes business income in crypto; you’d think most of us would report $$$ earned on crypto as a capital gain, but even an isolated incidence of purchasing BTC with the intent to sell could constitute business income (read up on the specifics here).
If your crypto gains are classified as a capital gain, only half of that amount will be taxed (this is called the “taxable capital gain”). If it is considered business income, the entire amount is subject to tax.
Each circumstance is different, and you should do some research to figure out how your gains will be classified. And, if in doubt, get help! Give your accountant or a tax professional a call for some advice.
Once you’ve determined which category you fall into, and you’ve read the rest of this article (cuz there’s more!!!!!) you (or your accountant) would report your gains or income earned from crypto use as either business income or a capital gain on your income tax form (just type the lil number in the lil box, or call your accountant mid panic attack and make them figure it out!).
How Is Cryptocurrency Taxed?
Just holding BTC isn’t itself taxable, but using crypto can have tax consequences. This means when you sell, gift, or transfer your bitcoin, you will have “disposed” of that asset.
The two most common scenarios folks like us (normies) encounter will be selling or transferring cryptocurrency. Selling BTC, for example, you can do on your Mogo app in Bitcoin + Rewards. Say you put $10 into BTC last month, the price went up a bit and you had your fun, and now you’re ready to sell. Say you sell at a 5% increase, which would give you $10.50. That extra $.50 you earned on your initial investment is your capital gain, and that’s the stuff the government could tax.
The other thing you can be taxed on is “transferring” crypto, for example to buy another kind of crypto or to purchase a good or service.
The government considers bitcoin transactions to be a trade, as in, a barter transaction. This is because the government doesn’t recognize BTC, or other cryptocurrencies, as legal tender (cash money); instead, it’s like trading a stock for another stock, or trading a cool shaped rock for a couple chickens or something. If you engage in a crypto transaction where the value of the trade can’t directly be determined, you have to calculate the value using a “reasonable method,” which might include “an exchange rate taken from the same exchange broker you are using or an average of midday values across a number of high-volume exchange brokers.” Oof. You can always tell when it’s CRA speak, can’t ya???
How To Report Cryptocurrency Gains On Taxes
To report your crypto wins on your taxes, you have to figure out the value of your possessed BTCs (etc!) correctly. If it is considered capital property, you’ll need to ensure you’ve got the right adjusted cost base, which is confusing AF!
If your holdings are considered inventory, where it would be counted as part of a business, you could use either of these methods to determine its value:
- value each item in the inventory at its cost when it was acquired or its fair market value at the end of the year, whichever is lower
- value the entire inventory at its fair market value at the end of the year (generally, the price that you would pay to replace an item or the amount that you would receive if you sold an item)
(That’s from the CRA again. Could you tell? Niche terminology. Confusing sentences. We truly hate to see it!)
But that’s not all you’ll have to figure out! To report your income to the CRA (and not set yourself up for an audit), you’ll have to keep track of important details about your crypto activity. These include:
- the date of the transactions
- the receipts of purchase or transfer of cryptocurrency
- the value of the cryptocurrency in Canadian dollars at the time of the transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party (even if it is just their cryptocurrency address)
- the exchange records
- accounting and legal costs
- the software costs related to managing your tax affairs.¹
If you don’t maintain these records and the CRA comes-a-knockin’, you’re gonna be in trouble. It’s going to be way more work to figure this stuff out after the fact.
If you’re using Mogo Bitcoin + Rewards, this is made easier, because we keep a lot of that data handy for you.
In Conclusion: Taxes Are Hard
TL;DR. You’ll likely have to report income you earn on the selling, or transferring of cryptocurrency. Figure out if it’s capital gain or business income. Report it on your taxes in the corresponding box.
If you don’t, you might get in trouble, and that’s a bad vibe.
Like anything to do with the CRA or the government, figuring out the specifics of reporting this stuff can be so friggin overwhelming. This writer has before burst into tears upon receiving notice of an audit. We hate this stuff too.
So as you set out to include your crypto gains in your income tax filing this year, just remember: you are smart. You can understand this stuff. Take things slow, read slowly, take notes, and take breaks.
Once you understand your specific circumstances, reporting will be a breeze. Unfortunately, you’ve got to do a bit of legwork in the meantime. And, at the end of the day, there are tax professionals that you can get help from because this stuff ain’t easy.
XOXO CRYPTO TAX GIRL
The contents of this blog are provided for informational purposes and is not intended as personalized tax, investment, or other professional advice. Every situation is unique and you may wish to get advice from a qualified professional regarding your taxes.
1 Agency, Canada Revenue. “Guide for Cryptocurrency Users and Tax Professionals.” aem, June 27, 2019. https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html.