Plenty of Canadians have dipped their toe into cryptocurrency markets and while you may not think of this as a traditional asset class, those investments can have an impact on your taxes. Nicole Ewing, Director of Tax and Estate Planning with TD Wealth, joins Kim Parlee to talk about what you need to know about how the Canada Revenue Agency treats cryptocurrency holdings.
Nicole, good to see you. Let's start with the basics. Do you need to report your cryptocurrency investments to the CRA?
- So you do. As a Canadian resident, you are required to report your worldwide income, wherever it may be, whether anybody knows that it exists or not. It is a self-reporting system. You are required to report all of your income. And not reporting your income is tax evasion.
So that's illegal. There are serious implications for that. We have penalties that can be quite significant. And so, yes, you do want to ensure that you are meeting all of your obligations, including reporting your crypto transactions.
- That is clear. That's what we're going for here-- getting some good clarity. OK, crypto is taxable, as you said very clear. What kinds of things do we need to report?
- So simply holding or possessing cryptocurrency likely won't result in any tax consequences. But you may still have a reporting obligation if it meets the definition of specified foreign property. So you would need to report that on your T1135. But if you are selling, trading, converting, doing anything with your cryptocurrency, that is going to initiate a tax consequence.
And the one thing that I think is not clear or intuitive yet to folks is that purchasing something with your cryptocurrency will also result in a taxable event. And I'll give you an example. So say I got my crypto, my cost is $5,000, I've held on to it, it's now worth $10,000, and my buyer is willing to accept crypto for the purchase of a couch or a car-- when I exchange my $10,000 of crypto for their item, I've actually disposed of my crypto.
And that is a taxable event. And so that $5,000 is potentially a capital gain or other type of income depending on my circumstances. But it is a taxable event, which is very different than if I were to make that same purchase with cash, right? With cash, it's something I purchase, I buy it, the CRA has no interest in that type of a transaction-- it is very different when I'm purchasing something with cryptocurrency.
- That's pretty significant. And it's interesting to note, because I think the majority of people who've been looking at this have not been using it to buy things. But the idea of having a tax event every single time you buy something if you're doing it frequently is a lot. I don't know how else to say it-- that's pretty significant.
- Even if you're purchasing crypto for crypto, so one type of crypto for another type of crypto, that is, again, disposing of one and acquiring the other. So yes, it can get quite complex.
- Yeah. Yeah. Interesting. How does the CRA tax crypto holdings? We've established when it's taxable. What specifically happens at that event?
- So this is-- so firstly, it's not a currency for CRA purposes. It's regarded as a commodity. And how it will be taxed really depends on how you're engaging with it. And so whether or not it's a capital gain or business income is determined by how you have been-- what your intent is when you're dealing with cryptocurrency.
And so if it gets into a commercial activity or it looks and feels like a commercial activity, that is going to be business income or business loss, as opposed to capital gain or capital loss. And things like the frequency of how often you're making trades, how long you're holding on to the crypto before you're doing anything with it, whether or not you're engaging with it in a business-like manner-- are you advertising it?
So all of those sorts of factors will be looked at to determine whether or not it's business income, which is 100% includable in your income, versus capital gain, which is, at the moment, 50% includable in your income, so very different tax results.
- And at least that there is some likeness to trading equities or anything else where it's your activity versus the instrument you're actually using right there. So at least there's some likeness, I guess, in terms of understanding it. Someone's hearing this and they're thinking, what kind of records do I need to be-- you did say self-reporting, but what kind of records do you need to be keeping?
- So there are a number of softwares that can help you keep track of this sort of information. What CRA is going to be asking for you and requiring you to prove are things like the date of the transaction, what the Canadian dollar value was at the time of the transaction, who was involved in the transaction, receipts and other details.
We want to be essentially being in a position to say what, and who, and when you were dealing with these cryptocurrencies. And if you are mining, which is generally going to be regarded as a commercial activity, you might keep track of things like your hardware costs, your power costs. If you have software costs, or legal fees, or accounting fees associated with your tax compliance, that should all be kept track of as well.
And some exchanges might have this information available. They're going to have different standards as to how long they're keeping that information. So you want to be pulling that off yourself on a fairly regular basis.
I was just speaking to a friend of mine whose family member wanted to get up to date and went back and started looking at their transactions to get their affairs in order. And they had 10,000 transactions. So you can imagine that's a very difficult number to be manually dealing with. So you want to have a system in place to be in a position to defend the numbers that you're reporting to the CRA.
- Wow. There's just a lot here to take in. I think there's probably a lot of people who may be listening to this and kind of understanding what's going to be required to do this. If somebody has realized they haven't done things properly in the past, what should they do?
- Well, we want to fix our mistakes. And mistakes are bound to happen, and particularly with something new like this. And so if we have now determined that how we reported or didn't report things in the past is incorrect, then we want, firstly, to seek the advice of experts who can help us sort of navigate this system. But you can amend past returns.
Again, if this is a commercial activity and you're realizing this is actually business, you may have GST and HST returns to be thinking about as well that haven't been done. And you may also want to avail yourself of the voluntary disclosure program. And that's essentially a program where you come to CRA before they come to you, before you're on their radar, and you advise them of the transactions that need to be reported.
And that is going to potentially get you out of some of the more very serious penalties that could apply if they find you first. So seeking the advice of an expert in this area and making sure that you do the best reporting that you possibly can and fix any mistakes you've made in the past-- again, mistakes happen. They happen with all types of tax returns and assets. Crypto's new. Just make sure that moving forward, you're getting on the right side of things.
- Always informative. Nicole, thank you.
- Oh, my pleasure, Kim.