Tax On Bitcoin In Canada – All you need to know…
This article covers everything you need to know about tax on bitcoin in Canada.
It’s not every day that an entirely new financial structure comes along. In the past decade, bitcoin and other similar cryptocurrency have entered the financial landscape. They are quickly forming the foundation of the new financial order of the world. As such, people are flocking to this system to get in on the ground floor.
The uniqueness of cryptocurrency allows you to use them for multiple revenue streams. You can trade them and earn profits, you can mine them, lend them or simply buy and hold them. No matter what you do though, you have to pay taxes on them. That’s virtually the law everywhere and in Canada too. The Canadian bitcoin laws are clear in this regard.
Tax On Bitcoin In Canada
The Canadian Revenue Agency (CRA) oversees all matters related to taxation. Naturally, the agency is responsible for crypto taxation as well. They have stated that for taxation purposes, cryptocurrencies like bitcoin will be treated as commodities.
So, if you make any sort of profit or income from bitcoin, you need to classify it as business income or capital gains. Of course, the same applies to losses as well. You need to remember that there needs to be some sort of transaction or transfers for tax laws to apply.
When Will The Tax Laws Apply?
The CRA has done a good job of clarifying when tax laws will apply while dealing in cryptocurrency. They will apply if you do the following:
– If you use cryptocurrency to buy and goods or services.
– If you exchange cryptocurrency for fiat and vice-versa.
– If you gift cryptocurrency to someone.
– If you trade in cryptocurrency, even if it just crypto-to-crypto transactions.
– If you sell bitcoin or other cryptos.
How Should You Classify Income?
To know your tax obligations, it is important to classify your income first. Only then will you know the exact process to calculate tax. To do so, the first thing you need to determine is whether your activity is business-related or not.
The CRA has clear guidelines as to how you can classify your activity. The following guidelines are taken from the CRA’s website:
If you are doing the following, then it is clear that you are carrying on some form of business activity:
– You undertake an activity with an intention to make a profit.
– You undertake an activity for some commercial reason and in a commercially viable manner.
– Your activity has the features of a business like creating a business plan or acquiring capital assets, etc.
– You promote your cryptocurrency product or service.
Some of the common examples of cryptocurrency businesses are as follows:
– cryptocurrency trading
– cryptocurrency mining
– cryptocurrency exchanges, including Bitcoin ATMs
How To Calculate Tax On Each Income Type? – Tax On Bitcoin In Canada
At this point, it is clear that there are two types of income pertaining to cryptocurrency. And these two types of income are taxed differently. For instance, the totality of business income is taxable. However, only 50% of the capital gains are taxable. You need to ascertain which category your activities fall under.
To understand this better, you can take the following example. If you are just buying and holding, capital gains will apply when you sell in the future. Let’s say you bought bitcoin at $10,000 and later sell it for $40,000. Then you will have to pay capital gains tax on $15,000 (half of $30,000 profit).
If you are actively trading and frequently buy and sell cryptocurrency, then business income will apply. In this case, 100% of the profits will be taxable.
How Is Bitcoin Mining Taxed?
This one is quite simple to determine. If you are undertaking bitcoin mining as a hobby (personal activity) then your profits won’t be taxable. But if you are undertaking mining as a business activity, it will be taxed.
Although the law is really clear and simple, each case is classified separately. This is because mining activities include a lot of variables. This might cause problems in determining the classification.
How Are Airdrops Taxed?
The advent of cryptocurrencies introduced us to a concept of airdrops. As the name suggests, airdrops are coins that are distributed for free. Often times, companies conduct airdrops as part of a promotional campaign.
When you receive an airdrop and later sell that amount, all of it will be taxed. That’s because the cost of procurement for you is zero in this case.
How Are Crypto To Crypto Trades Taxed? – Tax On Bitcoin In Canada
Unlike many places in the world, Canada has some complicated laws regarding crypto to crypto transactions. According to the law, every single crypto to crypto transaction must be examined to calculate tax obligations.
This is important because it might get common for people to not involve fiat at all in their lives. They can simply use crypto to pay for everything that they need. Therefore, it is important to bring them into the taxation regime as well.
Keeping All Bitcoin Records
As stated above, all cryptocurrency transactions need to be examined to calculate your tax obligations. Therefore, it is important to keep a record of every single cryptocurrency transaction. Otherwise, it might become impossible to calculate taxes properly.
According to the guidelines of the CRA, you must keep the following records:
– all exchange records.
– all digital wallet records.
– records of all the dates of transactions.
– records of all transfers of Bitcoin.
– value of Bitcoin in Canadian dollars at the time of each transaction.
– description of all transactions (why it was done)
– record of the accounting and legal costs involved.
– software costs to manage tax obligations.
Using Automated Software
Since keeping a record of every single cryptocurrency transaction can be a headache, it is advisable to use automated software. You simply have to plug in your exchange APIs or link your wallets into the software and it takes care of everything.
This has provided relief to so many cryptocurrency traders and users alike. It saves cost and time for the user.
Reporting Bitcoin Taxes
You have to report your capital gains from Bitcoin on Schedule 3 Form. And you need to report your business income from crypto on T2125 Statement of Business or Professional Activities.
For more information, you can visit CRA’s website.
Also read:
-Tax On Bitcoin In Canada – All you need to know