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 (or “crypto”) are property for purposes of the Income Tax Act (Canada). As such, dispositions of crypto ordinarily give rise to income tax consequences. If the disposing taxpayer held the crypto for long-term investment purposes (in tax circles, as “capital property”), a capital gain – or loss – normally 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. The gain in either case would generally be computed as the difference between the crypto’s sale price and its original acquisition cost.
A common myth is that sales of crypto in exchange for other crypto – or “crypto-to-crypto” trades – are 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/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 crypto as payment, and the treatment as crypto itself as fiat.
Another common myth is that one can trade crypto with minimal to no detection risk by outside parties, such as 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. U.S. provides a direct answer: crypto trading exchanges retain, and may be required to disclose, personal information of its users. The spectre of a similar step being taken by the CRA is real, not imagined. Even crypto 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 crypto have many special tax considerations. Crypto held outside Canada (most notably, on foreign exchanges) may require special disclosure on foreign reporting forms. GST/HST 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 USD$530million from Coincheck in Japan), carries its own host of tax consequences. All of those are nuanced issues in a fluid and ever-evolving industry.
Cryptocurrencies are an exciting development. The potential for blockchain technology is limitless. Along with the rewards, however, come a variety of risks, not the least of which is tax. Failure to comply with all applicable tax obligations can result in severe penalties and hefty arrears interest.
If you have questions regarding cryptocurrency transactions or the resultant tax obligations, we can help. Despite the nascence of the crypto markets, we are rapidly developing expertise in analyzing and advising on crypto transactions. As a firm, we have committed to staying on the cutting edge of tax law, and cryptocurrencies are a prime example where we set ourselves apart from the competition.