The Basics

In 2009, the first decentralized cryptocurrency, bitcoin, was created as open-source software. A little over a decade later, the cryptocurrency economy has exploded onto the world stage, with a value of more than $3 trillion at the time of writing this article. Cryptocurrencies generally do not exist within the purview of a central bank, central authority, or government, the way most traditional forms of currency do. They are considered to be digital assets that can also be used as a medium of exchange for goods and services between the parties who agree to use them. 

Tax Considerations

For the purposes of taxation, the Canadian Revenue Agency (the “CRA”) has chosen to treat cryptocurrency as capital property under the Income Tax Act. While this has a number of different tax implications for cryptocurrency traders, the biggest takeaway is that any gains from a transaction of cryptocurrency can be treated as either business income or capital gain depending on the circumstances.

While most casual traders of cryptocurrency might expect to pay only capital gains tax on their earnings from the sale of cryptocurrencies, there are a number of factors involved in which the revenue earned from trading cryptocurrency will be considered to be business income. The test for whether a gain should be treated as a business income or capital gain was laid out by the court in Happy Valley Farms Ltd v MNR, 1986. In summary, the Court will analyze the following factors along with the specific facts and circumstances surrounding them.

  1. The nature of the property sold. 
  2. The length of the period of ownership. 
  3. The frequency or number of other similar transactions by the taxpayer. 
  4. Work expended on or in connection with the property realized. 
  5. The circumstances that were responsible for the sale of the property. 
  6. Motive. 

Foreign Held Cryptocurrency

Additionally, owners of foreign-held cryptocurrencies should also remember that Canadian residents are required to file a Form T1135 whenever the cost amount of their foreign property exceeds $100,000 at any time during the year. This means that for the purposes of the T1135 reporting requirement, cryptocurrency situated outside of Canada that is not being used exclusively to carry on an active business would be considered ‘specified foreign property’. 

New Developments

A relatively new innovation, there are few if any court decisions relating to the taxation of cryptocurrency at the present. But while there are still a number of questions surrounding the taxation of cryptocurrency, there are indications that the CRA intends to pursue buyers and sellers of cryptocurrency it sees as evading taxation in relation to those transactions.

Recently in the case of Minister of National Revenue v Coinsquare Ltd., the Federal Court of Canada issued an order that will allow the CRA to compel Coinsquare, a major cryptocurrency exchange in Canada, to produce information relating to a number of anonymous individuals pursuant to its powers under section 231.2 of the Income Tax Act and section 289 of the Excise Tax Act.

Going into the Future

Seeing all of this play out in real-time, it’s hard not to be reminded of Benjamin Franklin’s famous quote regarding death and taxes. While some issues relating to the taxation of cryptocurrency are straightforward, there are a number of uncertainties when it comes to cryptocurrencies such as when the mining of cryptocurrency becomes a taxable event or how foreign currency transactions will apply.  In such cases, legal advice from a professional tax lawyer can help taxpayers meet their reporting obligations, and fight back against CRA reassessments.

DISCLAIMER: Please note this article is not legal advice. Always consult a lawyer for legal advice regarding your particular situation. The article is not necessarily a complete and accurate picture of the law – it is an article of a general nature.

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