The Canada Revenue Agency (CRA) has identified that
cryptocurrency such as Bitcoin, Ethereum, Solona, and Ripple (XRP)
are taxable assets. The technology behind cryptocurrency is the
blockchain. The blockchain includes a permanent end eligible ledger
which records and stores records of all cryptocurrency
transactions. This replaces the need for a financial institution to
validate transactions. This is why many cryptocurrencies are
generally referred to as peer-to-peer systems.
As more individuals and business adopt cryptocurrencies, the
need for clear tax guidelines have become more apparent. While
legislation and case law have not yet distilled Canadian taxation
guidelines, there are several key ways in which taxpayers can
protect themselves in order to minimize tax problems.
Why Keep Records?
Our top Canadian crypto tax lawyers’ stress that one of the
most important ways to protect yourself from Canada Revenue Agency
(CRA) tax audit problems is to keep a record of all
aspects of your cryptocurrency transaction history. Because
trading, selling, and mining cryptocurrency coins and tokens have
significant tax consequences, keeping detailed records is essential
in any dealings with the CRA. For example, one key area of dispute
between the CRA and individual taxpayers concerns whether a
particular transaction is considered a capital gain or business
income. Because of the capital gain inclusion rate – only half of capital gains are taxable – if there
is a gain, it is likely tax advantageous for the taxpayer to report
the gain as a capital gain rather than business income. It
is also tax advantageous to report losses as business
losses because they can be fully utilized to reduce your overall
taxable income. On the other hand, only half of capital losses
(just like capital gains) are included as taxable capital
losses.
In a dispute about whether a particular transaction should be
reported as a capital gain or business income, evidence is used to determine
the outcome. Without proper record keeping, it will be
significantly more challenging to prove that your interpretation is
correct, and the CRA may disallow your characterization to your
detriment. This could potentially force the taxpayer to pay a
larger tax amount than is required. Had the taxpayer kept detailed
records, this would not be the case.
Because multiple transactions may be necessary to purchase or
sell a crypto coin, the number of transactions can create the
appearance of artificially increasing the volume of trades. Because
of this, detailed records indicating the purpose of each
transaction is important to provide an accurate picture of the
nature and purpose of all trades.
For cryptocurrency, keeping records is especially critical
because of the unclear characterization and regulatory
circumstances surrounding cryptocurrencies. For example, in 2020,
the US Securities and Exchange Commission, commonly referred to as
the SEC, filed a complaint against CEO, Brad Garlinghouse and
Chair, Christian Larsen of Ripple Labs. The filing argued that XRP,
the cryptocurrency created by Ripple Labs, was a security rather
than a commodity. This distinction has significant regulatory and
potentially taxation consequences for investors of the
cryptocurrency. Because of the inchoate nature of cryptocurrency
and therefore regulation, keeping in-depth records is a key
protection for traders, miners, and stakers.
Keeping Records
Recently, the CRA provided a long list of important details that
a person trading cryptocurrency should keep. For cryptocurrency
traders, the CRA has outlined that it is essential to record:
- the date of the transaction
- the cryptocurrency addresses
- the Transaction ID
- receipts for the purchase or transfer of cryptocurrency
- value of the cryptocurrency in Canadian dollars at the time of
the transaction - a description of the transaction
- exchange and wallet records
- accounting and legal costs
- fees incurred to trade the cryptocurrency
- software costs related to managing you tax affairs
It is important to note that this list is not comprehensive.
Moreover, for individual “hobby” traders, the list of
important records to keep is likely shorter than for professional
miners or those who trade cryptocurrency as their primary
business.
For those who mine cryptocurrency, it is also essential to keep
records of:
- receipts for purchasing cryptocurrency mining hardware
- receipts to support your expenses associated with the mining
operation - the mining pool contracts and records
- any other records on the mining activities
- the disposal of cryptocurrency earned through the mining
activities
For those who use cryptocurrency as a medium of exchange, the
first list applies. The CRA has characterized Bitcoin and other
cryptocurrencies (such as Ethereum and XRP) as a commodity for
medium of exchange purpose. This means that the purchase of sale of
goods and services using Ethereum, for example, is considered a
“barter transaction”. In a barter transaction, the cost
and sale price of the goods or services is the value of the goods
and services, in Canadian dollars. So, if a kilogram of apples is
normally worth $4.00, and one “Applecoin” is used as a
medium of exchange to purchase the kilogram of apples, the cost and
sale price is $4.00. In the case of a barter transaction, such as
purchasing a good or service, it is likely that sales taxes such as
GST, HST, PST, or QST may apply. These too, must be recorded, and
for the service provider, remitted and paid to the government.
Section 230 of Canada’s Income Tax Act
Section 230 of the Income Tax Act imposes a requirement
on Canadian taxpayers to keep adequate books and records. Thillis
record-keeping requirement applies to all persons who are required
to pay tax or collect income tax and includes those who are not
Canadian tax residents but carry on a business in Canada. Section
230 requires that the books and records be sufficient to determine
the amount of income tax payable. The records and books must be
kept at the persons residence or place of business.
T1135
Another important reason to keep records of your cryptocurrency
is the foreign property requirement. Taxpayers who
own more than CAD$100,000 in specified foreign property has an
obligation to fill out a Form T1135. In April 2015, the CRA took the
position that cryptocurrency such as Bitcoin, Ethereum, Solona, and
Polkadot constitute “funds or intangible property”. As a
result, if the cryptocurrency is held, situated, or deposited
outside of Canada (and not use or held in the course of carrying on
a business), it is considered specified foreign property. Hence, if
Canadian tax resident has cryptocurrency with
a cost base at $100,000 or above, they are required to report it on
the T1135 Form. It is important to note that the $100,000 is an
aggregate value. So, if the taxpayer holds foreign real estate
worth $95,000 and cryptocurrency with a cost of $5,000, that is
sufficient to trigger the mandatory reporting requirement.
Pro Tax Tip:
Section 230 requires you to keep sufficient books and records
for a minimum period of six years. So, if you sold Bitcoin in 2022,
you are obligated to keep the records, books, and supporting
documentation until 2028. Failure to do so may lead to a criminal
offence under Section 238 of the Income Tax Act. Contact
our expert Canadian crypto tax lawyers to advise you about the
requirements for keeping sufficient books and records and whether
your transactions should be reported as capital gains or business income.
FAQ:
1. Do I have to keep records of all cryptocurrency
transactions?
Yes, failure to do so may result in a criminal offense under
Section 238. Not to keep records may put you at the mercy of the
CRA, who have broad powers to reassess your tax owing. Without
detailed records, the taxpayer has inadequate means of
demonstrating the correct tax owing.
2. If I use a US-based crypto wallet such as Coinbase,
do I have to report my cryptocurrency holdings?
If you have over $100,000 of specified foreign property, then
you are obligated to disclose those assets using the T1135 Form. If
you fail to do so, you may incur a penalty of $25 per day up to a
maximum of $2500. There may be additional penalties if the failure
to file was done knowingly or in circumstance amounting to gross negligence.
3. How do I know which records and documents are
relevant for my taxes?
For tax reporting purposes, record-keeping is critical when it
comes to cryptocurrency. Failing to understand which records,
books, or supporting documents are relevant for tax purposes may
create more tax liability than if you have the proper
documentation. Our Canadian crypto tax lawyers have assisted
numerous taxpayers with their cryptocurrency questions. To know
more about cryptocurrency record-keeping, consult with a Toronto tax lawyer by calling Rotfleisch &
Samulovitch PC today at 647-699-4314, or email us at
david@taxpage.com.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
