There are now over 1,300 cryptocurrencies available online, Bitcoin being the most popular, with new initial coin offerings, or “ICOs”, being announced on what seems like a daily basis. Bitcoin made headlines at the end of 2017 as the price skyrocketed from $4,000 in October to $19,000 in mid-December, dropping down to $13,000 within weeks. There are now many ways to exchange cryptocurrency for cash, including ATMs or online exchanges such as Coinbase. Although it may be tempting to spend all that cash, don’t forget to put some away to pay your taxes.
What is cryptocurrency?
According to Oxford Dictionary, cryptocurrency is “a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
What does the Canada Revenue Agency say?
In December 2013, the Canada Revenue Agency (“CRA”) stated that virtual currencies, such as Bitcoin, will generally be treated as a commodity for the purposes of the Income Tax Act (Canada) and will generally not be considered similar to dollars, pounds, euros, yen, pesos, or any other currency issued by a government of a country.
When a person exchanges cryptocurrency for cash, the resulting gain (essentially the difference between the purchase price and the sale price) may be considered a capital gain or business income. One of the reasons the distinction is important is because the effective tax rates that are applied to capital gains and to income from a business are different.
There are many factors to consider in determining whether the exchange of cryptocurrency for cash results in a capital gain transaction or business income, and the analysis depends on the specific facts of each situation. While the CRA has not issued a publication regarding cryptocurrency specifically, it does refer taxpayers to Interpretation Bulletin IT-479, Transactions in Securities (here), which provides general comments for the purpose of determining whether transactions are income or capital in nature. Some factors to consider in the securities context include the frequency of the transactions, period of ownership, knowledge of securities markets, and time spent.
If a loss is realized on the exchange of cryptocurrency for cash, similar rules may apply to determine if the loss was a capital loss or a business loss. One of the reasons the distinction is important is because different rules exist regarding the type of income that each type of loss can be applied against.
What does this mean?
Bottom line – cryptocurrency is not treated as a currency issued by a government of a country for income tax purposes. Don’t let the name fool you. When exchanging cryptocurrency for cash, don’t forget to report the transaction and resulting gain (or loss) on your tax return and keep some cash aside to pay any taxes owing.
The CRA has not made any recent comments regarding the taxation of cryptocurrency. As cryptocurrency gains in popularity, it will not be surprising if reporting and enforcement become a focus of the CRA, and other revenue authorities around the world.