The meteoric rise and subsequent tailspin in the price of bitcoin has incited rampant investment in cryptocurrencies. Over 1,400 coins or tokens are now in circulation. Often lost in the resplendence and chicness of buying and selling cryptocurrencies are the tax consequences.
At a basic level, cryptocurrencies constitute property under the Income Tax Act. As such, dispositions of cryptocurrencies ordinarily lead to income tax consequences. If a disposing taxpayer holds cryptocurrency for long-term investment purposes (ie, as capital property), a capital gain or loss usually arises. If held as part of an active business, or even as a one-off venture to make a profit, any gain would ordinarily be fully taxable as business income. In either case, the gain would generally be computed as the difference between the cryptocurrency's sale price and its original acquisition cost.
A common myth is that the sale of one cryptocurrency in exchange for another (so-called 'crypto-to-crypto' trades) is non-taxable. If all conversions to fiat are properly reported, who cares about what happened beforehand? Unfortunately, crypto-to-crypto trades are barter transactions and thus taxable events. Timing issues, gain or loss computation discrepancies, and valuation problems (among others) can arise if only sales for fiat are taken into account. This issue is exacerbated by the growing number of stores accepting cryptocurrencies as payment and the treatment of cryptocurrency itself as fiat.
Another common myth is that cryptocurrencies can be traded with minimal to no detection risk by outside parties (eg, the Canada Revenue Agency (CRA)). Enhanced privacy, digital confidentiality and near unfettered secrecy have imbued the crypto community with a false sense of impenetrable anonymity. To this, the Internal Revenue Services' actions in Coinbase v the United States provides a direct answer: cryptocurrency trading exchanges retain, and may be required to disclose, the personal information of their users. The spectre of a similar step being taken by the CRA is real, not imagined. Even cryptocurrencies held in cold storage or traded outside an exchange may be uncovered through the many tools at the CRA's disposal.
Ultimately, persons dealing in cryptocurrencies have many special tax considerations. Cryptocurrencies held outside Canada (most notably, on foreign exchanges) may require special disclosure on foreign reporting forms. Goods and services tax and harmonised sales tax obligations may unsuspectingly arise in day-to-day transactions, particularly for those involved in crypto mining (whether based on proof of service or proof of work). Theft and hacking, which is rampant in the crypto world (see last month's theft of US$530 million from Coincheck in Japan), carries a host of tax consequences. These are all nuanced issues in a fluid and ever-evolving industry.
Cryptocurrencies are an exciting development. The potential for blockchain technology is limitless. However, along with the rewards come a variety of risks, not least of which is tax. Failure to comply with all applicable tax obligations can result in severe penalties and hefty arrears interest.
For further information please contact Alexander Demner at Thorsteinssons LLP by telephone (+1 604 689 1261) or email (email@example.com). The Thorsteinssons LLP website can be accessed at www.thor.ca.
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