Cryptocurrencies have been on the rise in popularity. Cryptocurrencies are digital currencies that make use of blockchain technology to allow for fast and anonymous payments online. Blockchain technology is a decentralized archive in which transactions are made public for all users to see. This allows parties to make peer-to-peer transactions without the need for a third party (such as a bank) to approve or verify the transaction. In Canada, cryptocurrency has become an increasingly popular form of payment online and can also be used as an investment opportunity.
What is cryptocurrency?
Cryptocurrencies are a form of digital or virtual currency that uses cryptography for security or authentication purposes. Cryptocurrencies are transferred between parties through an electronic system. They also use blockchain technology, which refers to a group of blocks that are linked together via cryptography. These blocks are stored in a manner that makes them secure from external tampering and revision so they will always display an accurate archive of transactions.
Cryptocurrencies are increasing in popularity
Cryptocurrencies have become popular tools for online purchases and transfers, particularly because they offer the anonymity that cash-based transactions do not provide. Internationally, dealing in cryptocurrency can help overcome the hurdles of sending money from country to country or the need for currency exchange. You can buy cryptocurrencies using your credit card or PayPal account, trade them on an exchange like stock markets or keep them on your computer in what’s known as a “wallet.”
You can send and receive payments using cryptocurrency just like you would with cash. However, since it is not tied to any specific country, there are minimal regulations regarding how you should report gains or losses when you sell your coins for fiat money, like Canadian dollars.
Canada is a leader in the cryptocurrency space
Canada is one of the few countries that has not banned cryptocurrency and is considered to be a leader in the cryptocurrency market. Recently, Canada became one of the first countries to make a legally recognized crypto-to-fiat exchange with its own version of Bitcoin called CAD-Coin. CAD-Coin was developed by Canadian banks to let people buy and sell all kinds of goods using cryptocurrencies that have been converted into dollars at rates set by those banks. This allows Canadians to purchase products from select vendors using their cryptocurrency assets without having to go through third parties like PayPal or credit cards.
Cryptocurrency and taxes in Canada
In Canada, cryptocurrency is treated as a commodity under the Income Tax Act. The CRA considers cryptocurrency to be a “digital representation of value” and therefore a taxable commodity. Income that comes from cryptocurrency is typically treated like business income or capital gains. Similarly, losses are treated as business losses or capital losses.
However, if you use cryptocurrency for personal use (as in, to buy goods or services) then it would be considered a barter transaction and not subject to tax. A barter transaction is when two parties agree to carry on a transaction without legal currency.
Each type of cryptocurrency, from Ethereum and Bitcoin to Solana and Dogecoin, is treated as separate digital assets. They must therefore be valued separately.
The difference between business income and capital gains
There are a few ways to dispose of cryptocurrency, but certain methods come with tax consequences compared to others. Any income you get from disposing of cryptocurrency, such as by selling it or converting it to government-issued currency, may be taxable as either business income or a capital gain.
Distinguishing the type of income is important because capital gains are only included in income at 50%, whereas business income is fully included. If you are in the process of starting a business, note that you may not be considered to have actually set it up yet. Once you start making profits in a business, they are business income and cannot be considered capital gains.
The CRA has outlined a few factors to consider in deciding whether income acquired from the disposition of cryptocurrency is business income. They are as follows:
- Promotion of a product or service.
- Intention to make a profit, even if unlikely to do so short-term.
- Carrying on activity for commercial reasons.
- Undertaking activities in a businesslike manner.
How to obtain cryptocurrencies
There are two common ways in which cryptocurrencies are acquired. The most common is by purchase through a cryptocurrency exchange. Another way is to earn cryptocurrency by mining.
Mining involves the use of a computer to confirm the authenticity of cryptocurrency transactions. When miners are paid for this work, they receive payment in the cryptocurrency they are validating. Income obtained by mining is not considered business income if it is done as a hobby. If this hobby is pursued in a way akin to business, however, the income will be taxed accordingly.
Cryptocurrency is changing financial markets worldwide
Whether or not you decide to invest in cryptocurrencies, one thing is for certain: they are here to stay. They have exploded in popularity since the Government of Canada first addressed them in 2014 through the lens of anti-money laundering legislation.
Although investing in cryptocurrencies comes with some risk, that may quickly be changing as digital currencies continue to be adopted in markets all around the world.
Contact Bader Law to ensure all cryptocurrency income is reported correctly
It’s important to remember to report all of your business income and/or capital gains from cryptocurrency come tax season. If you fail to report, you may be left with penalties and interest down the line.
The business lawyers at Bader Law have decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289) 652-9092.