When should Canadian crypto owners watch out for the taxman?

Tax obligations to the CRA will depend on specific circumstances surrounding cryptocurrency transactions

When should Canadian crypto owners watch out for the taxman?

With tax filing season just around the corner – tax returns can be filed from February 28 all the way up to the April 30 deadline – those who sold any crypto assets in Canada in the year 2021 should start thinking about their obligations to the Canada Revenue Agency (CRA) as soon as possible. And with cryptocurrencies, the filing process becomes considerably more difficult than it is with standard work.

According to guidance on crypto taxation from the CRA, which was prompted by a Senate review of crypto tax information in 2014, the disposition of any cryptocurrency – whether by giving, selling, or transferring the currency – results in a taxable event.

As explained in a recent Coindesk report, the most prevalent crypto transactions that are taxable include using cryptocurrency to pay for products and services; selling cryptocurrencies; switching from one coin to another (including swaps, exchanges and peer-to-peer trades); converting crypto assets into fiat money; and giving them as a gift to friends, family, or coworkers.

There are no tax requirements for just holding crypto. In a nutshell, the Income Tax Act states that any bartered transactions, such as the sale of cryptocurrency, shall be taxed. The CRA may treat a disposition as either business income or capital gain, depending on the specific type of transaction.

Crypto income generated as part of a company operation is treated as taxable business income. Determining whether or not income constitutes business income is done on a case-by-case basis.

The most common indicators and examples of business income include promoting a service or product; commercial activities carried out in a "viable way”; an intention to generate a profit, whether or not it will likely occur in the near future; and behaviours associated with a business, such as preparing a business plan and purchasing inventory.

While business activities are usually carried out on a regular basis, a single transaction can sometimes be considered business income. As a guide to judging individual cases, the CRA will usually look at the "adventure or worry in the nature of the trade.” Running a cryptocurrency exchange is one common example of a crypto business that can attract CRA scrutiny.

If the sale of a cryptocurrency does not constitute business revenue and it sells for more than the price it was bought at, the CRA considers the taxpayer to have realized a capital gain. Capital gains are deemed as income within the tax year of the disposition, but only half of the realized capital gains are subject to the capital gains tax.