Are you wondering if Canadian taxpayers have to pay tax on crypto holdings?
The wild west days of cryptocurrency are in the past. In its earlier days, crypto had a reputation as an online underground currency with black-market-style transactions. Not anymore! SO is just simply holding cryptocurrency taxable in Canada? No, however, there are certain situations where it is.
The Basics
Cryptocurrency is a digital asset, but it’s not legal tender in Canada. Crypto assets, also known as an altcoin, work as a digital “medium of exchange” that takes the form of tokens or “coins” between the people who agree to use them. Cryptocurrencies operate separately from a bank or government, but there are income tax implications for transactions involving crypto. When we refer to cryptocurrencies in this article, we are talking about Bitcoin or other virtual currencies like Ethereum, Cardano or Polkadot.
Canada Revenue Agency Involvement
In September 2020, the Canada Revenue Agency (CRA) filed a Federal Court application against Canada’s largest cryptocurrency exchange Coinsquare, to compel the Toronto-based cryptocurrency platform to divulge confidential tax information related to its customers. Although the CRA originally asked for all customer data, they amended that to request only data on customers with a cumulative deposit of over CAD 20,000 since they opened their account, customers with accounts valued at over CAD 20,000 for each year from 2014 to 2020, as well the 16,500 largest accounts by trading volume for those same years.
The CRA asked for the list of these customers’ accounts, a detailed list of all deposits and withdrawals for these accounts, a detailed list of all trading activities, a list of deposit addresses, as well as any other information Coinsquare had relating to those customers. Section 231.2 of the Income Tax Act authorizes the CRA to make third parties disclose documents related to tax collection, tax audits, and any other tax-related activities carried out by CRA in regards to Canadian taxpayers.
In March 2021, the Federal Court agreed with CRA’s disclosure request. The CRA’s request was considered reasonable because the request was made for a measurable group of unnamed taxpayers and to verify their income tax compliance. This confirms the ruling from Canada v. PayPal and Canada (National Revenue) v. Roofmart that the CRA is authorized to ask for third-party information disclosure against any sized group of unnamed taxpayers. They’ll be coming for more.
This agreement between the CRA and Coinsquare was undoubtedly influenced by the 2017 litigation between the Internal Revenue Service (IRS) and Coinbase in the US. After a very broad initial disclosure request by the IRS, the US Court allowed the IRS to only enforce disclosure for customers who traded USD 20,000+ over a specific period.
What does this ruling mean for Canadian taxpayers who have cryptocurrency holdings?
Holding crypto is not taxable, but any income from transactions involving crypto is treated as a capital gain or as business income, depending on the circumstances. As well, any losses are treated as capital losses or business losses. If you hold more than one type of crypto in a digital wallet, each type is considered to be a separate digital asset and is valued separately.
Expect there to be tax to pay when you:
- sell crypto
- trade or exchange crypto, including getting rid of one to get another
- convert crypto to government-issued currency, such as Canadian dollars
- use crypto to buy products or services
Up until this year, people have been assuming they could hide gains in crypto. Now, more people are becoming aware that not only do they have to pay taxes on gains, but the tax authorities have the top five to ten percent of traders’ information on hand, including their entire trade history.
If you’re buying and selling every week, the CRA will probably consider that a business, although there’s no clear line between what’s a capital gain or a business gain. No matter, if you’ve sold for profit, you must declare those gains. 50 percent of capital gains are taxed as an investor and 100 percent are taxed as a business gain.
If you only want to be paying tax on 50 percent, don’t buy, trade, and sell every week. Pick the ones you like and keep them. You don’t have to be afraid you’re going to be taxed for holding crypto, it’s when you give it up. The sale or trade is a taxable event.
Tax Non-Compliance
If you’re a Canadian taxpayer with crypto-related non-compliance, consider the voluntary disclosure program before a potential CRA tax audit.
Here are the eligibility criteria for the CRA’s voluntary disclosure program (VDP):
- The CRA must have no prior knowledge about your tax owing.
- You must reveal all tax years in which your filings were inaccurate.
- Must owe tax to the CRA due to those inaccurate filings.
- You can only disclose information that is at least one year past the filing due date.
If you’ve met that criteria, you must also show the dollar amounts involved, the number of years of non-compliance, and if you made any efforts to avoid detection in the past. According to a Coinsquare customer, the transaction record they were able to pull doesn’t indicate the time of the trade, or whether they were a market “taker” or a “maker” for calculating fees. Coinsquare support can provide a more detailed transaction record, but allegedly it can take quite a while to arrive.
You can use bitcoin.tax to track all of your transactions as soon as you buy or sell. It handles adjusted costs and you can print a report to supply with your taxes. It’s free with up to 20 transactions. For $40 US you can do up to 1,000 trading transactions.
Given the CRA’s plan to ramp up enforcement of cryptocurrency tax in Canada, time is of the essence for you to file a voluntary disclosure, if you’re non-compliant from your crypto endeavours. If the CRA already has their eye on you, you may have your voluntary disclosure application dismissed. And remember, when the CRA finds one issue they often assume there are more and keep on looking. Having professional support, like an accountant or a tax lawyer can help and can provide tax guidance as to whether transactions constitute capital gains versus business income, or perhaps both. They can also help you get through a CRA review, or worse, an audit.