How are cryptocurrency profits taxed?

Cryptocurrency was borne out of the backlash to the 2008 financial crash but that doesn’t mean it’s escaped the attention of the Canada Revenue Agency.

As some people get ready to submit personal income tax returns before the April 30 deadline, many are forgetting, or are unaware, that profit and losses from buying and selling fledgling cryptocurrencies like bitcoin and ethereum must be reported.

Bruce Ball, vice president tax for CPA Canada, said that with the CRA essentially confirming cryptocurrency as a commodity, investors must figure out whether their buying and selling comes under income or capital.

He said: “If you’re considered to be in the business of trading or active enough to be referred to as an adventure in the nature of the trade, then it’s income, so 100% goes into your income.

“But if it’s a capital gain then only 50% of it is taxable. If you have a large gain, then the difference between 100% and 50% is significant.”

Ball said the distinction is a “question of fact” but admitted that some people might be borderline and able to make a case for whatever treatment they prefer.

He added: “The 50% versus 100% also cuts the other way if you have a loss. If you have a capital loss, only half of it is deductible and you can only deduct capital losses against capital gains.

“I was talking to a counterpart in Australia and people that had a loss are a fairly big concern there for tax reasons. In Canada, I’m not sure that it’s such a big issue because capital losses are only deductible against capital gains, so maybe the concerns aren’t as high here.”

The uncertainty around tax and cryptocurrency, in Ball’s opinion, may be because it’s a space that is attracting new, relatively inexperienced investors. It’s also an industry that has no real modern historic parallels.

He said: “When you talk about internet start-ups and selling shares, they are still shares. It isn’t that much different to an established corporation. With cryptocurrency, the reason there might be uncertainty is because it’s different than most other things. What is it exactly?

“People that made a quick gain in start-up corporate shares, there is a lot higher probability that they understand they have to report that for tax purposes than crypto.”

Ball said that even if cryptocurrency investors realise they have taxable profits after the deadline, it’s never too late to report it the CRA.

He said: “It’s April now so they should still report it. If they discover later after the filing deadline, they should really come forward and report it to the CRA. If they discover someone has income, generally they can apply penalties in addition to tax plus interest.”