You could say the term “Bitcoin Bonanza” has been overused, but beyond the obvious alliteration, there is a reason the term has become so widely used in headlines throughout the world. The word “bonanza” harkens us back to the days of the American “Wild West” as gold was discovered on the West Coast and the massive gold-rush that followed. It's a great comparison with what's going on with Bitcoin and its crypto-cousins. The wild sense of adventure in hopes of cashing in on Bitcoin (and other cryptocurrencies) and the rush in hopes of finding life-changing wealth both feel a lot like the gold rush that opened up the West in days of yore.
As with any other type of commodity trading, the digital currency bonanza is very risky. There will be those who get rich. There will be those who go bust. And right now, it feels a little bit like a lawless land out there in the cryptocurrency world. It's new territory, and sometimes it feels like you can get away with anything in this new land of cryptocurrency speculation. But don't be fooled — there ARE tax laws in place, and if you have invested in the cryptocurrency game, you should know the tax rules.
In Canada, there hasn't been any need to actually change any rules to govern “cryptos.” Canada's existing tax rules handle cryptocurrencies quite nicely, thank you very much! Those who are simple investors (or speculators) will pay capital gains tax, assuming they sell at a profit. Capital losses will be incurred by those who don't do well. It's just like investing in any other currency or commodity.
There is only one significant tax difference from regular investing, which comes in the form of “mining.” Those who are familiar with cryptocurrencies know that you can actually earn some of the currency by lending your computing power to a decentralized network of computers that encrypt/decrypt the algorithms at the heart of the currency itself. This is usually (but not always) done with hyped-up computers using powerful graphics processors. The computing power needed to mine Bitcoin has gone beyond what most people could possibly do with any home-built computer, but other lesser-known cryptocurrencies still provide an opportunity for “mining.” Basically, if you're a cryptocurrency “miner,” that would be considered business income/expenses rather than investment income. So just like any other business, you would report the income and expenses on your tax return at the end of the year and pay tax on the profit. Expenses could include the extra hydro your mining rig takes, a small percentage of business-use-of-home, repairs and maintenance on your computer setup, and depreciation on the computer assets themselves.
It doesn't matter if you're a miner or just a regular investor, any income earned from the crypto phenomenon IS taxable in Canada. And just like any other business or investment activity, the onus is on you to keep adequate books and records.
Beyond investing in digital currency as a commodity, if you are using digital currency to pay for (or receive payment for) goods or services, the rules for barter transactions apply. A barter transaction occurs when any two persons agree to exchange goods or services and carry out that exchange without using legal currency. For example, paying for movies with digital currency is a barter transaction. The value of the movies purchased using digital currency must be included in the seller’s income for tax purposes. The amount to be included would be the value of the movies in Canadian dollars.
Most of the major platforms that trade cryptocurrencies are now collecting personal information, including social insurance numbers. So what once may have seemed like the lawless Wild West where anything goes is no longer. Those days are over. We have a self-assessment tax system here in Canada, but the penalties and consequences for deliberately omitting income from your tax return or for failure to keep adequate books and records related to your business or investments can be severe.
For more information on how to track and report your gains/losses, please contact your local Liberty Tax Service office.
Disclaimer: This article is intended to provide generalized financial information. No part of this article is intended to provide investment, legal, professional, or personalized advice. Liberty Tax Service does not endorse or promote any investment activity. For personalized advice on your taxes, your investments, and the law, you should seek the assistance of a professional who knows your particular situation.