March 26, 2018 CANADIAN CRYPTO TAX LEGAL VS. REASONABLE REQUIREMENTS With special guest Kyle Mackenzie CPA, Partner, & CTO at Metrics Chartered Professional Accounting Disclaimer This guide only applies to Canadian taxation, and is only meant to EDUCATE on how the CRA and Canadian government view cryptocurrency taxation. This is not legal advice. In the future there may be more concrete and confirmed instructions for filing cryptocurrency tax, which may make this guide irrelevant. KOIRESEARCHGROUP.COM INFO@KOIRESEARCHGROUP.COM
TAX SEASON HAS ARRIVED. As tax season approaches and new investors continue to flood the cryptocurrency space, the need for relevant tax information continues to increase. For Canadians, it certainly does not help that the Canadian Revenue Agency does not provide up-to-date information. When searching CRA cryptocurrency on Google you will find an archived page from 2013. So, for the upcoming tax year, how can you be sure that you file cryptocurrency gains properly, and without paying more than you need to? Here at Koi, we did some digging to find out the current situation with cryptocurrency tax in Canada and approached Kyle Mackenzie, CPA, Partner, and CTO at Metrics Chartered Professional Accounting to help clarify things. What follows are potential solutions for filing cryptocurrency gains, some alternative methods for special cases, and a solution for those who mine cryptocurrency.
INCOME VS CAPITAL GAINS The first thing you need to determine is whether your cryptocurrency profits (or losses) are considered income, or a capital gain. This is decided on a situational basis and depends if you are considered a shortterm trader, or a long-term investor. If you fall under the category of trader, you will likely be taxing your cryptocurrency gains as income, whereas a long run investor will be claiming his/her tax as capital gains. To evaluate if you are a short-term trader who would pay taxes as income, it is best to ask yourself if you meet the criteria below from Canada s 1984 Income Tax Act. frequent transactions, extensive buying and selling of securities short periods of ownership some knowledge of or experience in the securities markets security transactions form a part of the taxpayer s ordinary business a substantial portion of the taxpayer s time is spent studying markets and investigating potential securities purchases security purchases are financed primarily with margin or debt the taxpayer has advertised or otherwise made it known that he is willing to purchase securities securities purchased are speculative in nature or do not pay dividends.
If you find the short-term trader criteria constitutes your behaviour regarding cryptocurrency, you might qualify as a trader. Here are some benefits and detriments to this classification: Pros: You qualify as a small business - You can therefore write off the costs of equipment (Read: computer) against your gains. You can also write off things like a portion of your internet, cell phone, and electricity/utilities If you make a loss in the year, these losses can offset income from a regular job or other business income. If you have other qualified capital losses, you are only able to write this off against other capital gains. Cons: Your gains will be taxed at your personal income tax rate. Income, less expenses to earn that income. For example, if you made some trades that resulted in a gain of $5,000, but spend $300 in trading fees to do so, your net income would be $4,700, versus only $2,350 as a capital gain. You will be required to file a T2125 business income return, which typically costs more in accounting fees (or time, if preparing yourself) than a standard T1 return with capital gains. You will also pay your personal income tax rate if you run a business or work for a company and are paid in crypto. These are convertible at the time of receipt in the Canadian dollar equivalent. Contact the Metrics team if you need help classifying yourself or think you may be considered a trader. Based off these factors that classify a trader, many of us do not fall into this category, and can instead file our taxes as capital gains. With this in mind, let s run over a quick example of how the CRA treats capital gains tax. CAPITAL GAINS TAX In short, 50% of your capital gains are taxed, and are taxed at your marginal income tax rate. For example, let s say you bought for $500, sold at $600, and now you have $100 of capital gains to declare. For 2018, your first $46,605 is taxed at 15%, so for this example, you would pay: ($100*50%)*15% = $50 * 15% = $7.5 In this scenario you would report the $100 gain, keep $92.50 and pay $7.50 in capital gains tax. ** NOTE: We are ignoring provincial taxes for the simplicity of this explanation **
WHERE KOI AND METRICS DIVERGE When we started our initial discussions with Metrics, we noticed some areas of subjectivity (due to lack of regulatory clarity). Our main disagreement is with crypto-to-crypto barter transactions, and whether these should be taxed in addition to your withdrawals back into Canadian dollars. Provided below is Koi s opinions in blue, juxtaposed by Metrics opinion in red. All content in Black represent areas of agreement. Please be advised that Koi is simply stating what should be expected or is reasonable to expect, where Metrics is adapting law designed for the traditional commodities industry. WHAT DO I TAX? You should organize and track all of your withdrawals from fiat-crypto. You should be able to find this information in your trade history on the cryptocurrency exchange(s) you use. These are the transactions that will dictate your capital gains tax. It is difficult for us at Koi to recommend paying capital gains on your crypto-to-crypto trades. As mentioned in our introduction, Canada s last statement on digital currencies and tax was in 2013, an era where Bitcoin was being scrutinized for money laundering and other criminal purposes. The cryptocurrency space has drastically changed since then, with 2017 being a breakthrough year considering the dramatic increases in price and new technologies being built. With this being the start of mass adoption and mainstream awareness, we feel it is due time for Canadians to receive more concrete, recent, and relevant instructions for filing cryptocurrency taxation. There are many ways that countries treat cryptocurrency and the only other country to continue treating cryptocurrency transactions as barter trades is the Netherlands, who also have not updated their standing on the matter since 2013. If adoption of cryptocurrency continues along its current trend, a change in Canada s cryptocurrency legislation could be coming in the very near future. It is likely that new cryptocurrency traders will file their taxes in a number of different ways, leaving the government to decide in 2018 how to best proceed. Until then, if the government does not clearly state that each transaction is a taxable event then you may be overspending on taxes where it was not required. This goes against an investor s best interest and requires extensive tracking work for the entry-level investor. We believe in the future there should be a threshold for new investors held in a devoted account much like a crypto TFSA. We think that an account with incremental, fixed contributions no greater than $10,000 that needed to be reported but not taxed could have real benefit. The user could provide their public key(s) at tax time and allow authorities to check the payments to and from the wallet(s). This would alleviate stress for first-time buyers who tried their hands at trading and now have hundreds of trades to report for the first time. This would also incentivize individuals to start self-reporting early before their investment appreciates and tax obligations grow. If they reached a stage where their investment outgrew the limitations of this account, the Canadian government would be able to tax these gains accordingly. We see methods like this as potential future solutions that could bring cryptocurrency stakeholders and government regulators closer together.
WHAT DO I TAX? You should organize and track all of your trades from every exchange both crypto-crypto and fiatcrypto exchanges. We recommend downloading these and saving them in a file monthly, your accountant will ask for these files in order to calculate the gain. Gains/losses on cryptocurrency are calculated as of each trade you make. It is a common misconception that you only have to declare gains once you cash out to Canadian currency. The CRA defines cryptocurrencies as commodities. However, this classification extends only to trading cryptocurrencies for goods and services rather than for Canadian dollars. As is common with securities legislation, at Metrics, we have a strong belief that similar rulings will apply to cryptocurrency taxation, and advise all of our clients as such. The IRS has released in their most recent tax code changes that section 1031 like-kind exchanges will not apply to cryptocurrencies after 2017, and will only apply to real estate. Like-kind exchanges are exchanges of assets for other similar assets. While this may sound like it should apply to crypto, it does not. Take the following for example: Canadian dollars and American dollars are both currencies - Both similar assets, both stores of value that can be exchanged for services. However, any gains/losses on the exchange of these assets are taxable. While the CRA hasn t stated that cryptocurrencies are recognized currencies, the trend of crypto is most certainly heading in that direction. The concern is not that the CRA hasn t stated their opinion, but that they will state their opinion in several years and that it will apply to transactions dating back several years, in which case one would be liable for all interest and penalties on such transactions. Another reason we are recommending our clients declare their gains/losses on each transaction is tax planning. By declaring your gains/losses as you make them, you will be able to allocate your tax liability to each year you make these gains or losses. UNREALIZED GAINS What if your gains are held in cryptocurrency and you know the dollar value because an app like Blockfolio or Delta calculates it for you? Well, those are unrealized gains and are not taxable until traded or converted. Due to issues that arise from taxing an entirely new asset class, Koi believes crypto-crypto trades are unreasonable to tax. Consider this, if you made a crypto-crypto trade in December 2017 and held the cryptoasset during the January 2018 crash, you may have locked in taxes worth more than the cryptoasset is valued today. Any gains you have made but not withdrawn should only exist as paper gains. you do not have to report unrealized gains. Whether it is foreign currency, stocks, or cryptocurrency you have not yet cashed, you do not have to report these gains because you have no profit to report. Any gains you have made but not withdrawn are taxed at the time of a transaction based on its fiat value at the time of the trade. This includes crypto-fiat, crypto-crypto, and using crypto to purchase real goods. At the time of the transaction, the gain/loss should be recorded and taxed at its fair market value.
If you make a purchase with crypto for goods or services, and it has appreciated (depreciated) in Canadian dollar value since you bought it, your gains (losses) will be calculated at the Canadian dollar value at the time of the exchange/sale as reported by a reliable market guide. Metrics identifies https://coinmarketcap.com/ and https://www.cryptocompare.com/ as two notable examples. If you receive payment for services in crypto, be sure to record the dates and volume of crypto received, as these will be recorded as income. FOREIGN CURRENCY What about claiming it as foreign currency? What if your cryptocurrency gains have exceeded $100,000? There have been some mentions online that it is possible to consider cryptocurrency as a foreign currency, which you would have to declare as foreign currency/property if it exceeded $100,000. This is likely not applicable to most investors for two reasons: 1) Your tax return will actually ask if the cost of that foreign property was over $100,000 or not. Many investors have invested less than $100,000 in the cryptocurrency space, which immediately makes this irrelevant. 2) Since cryptocurrency is not tied to any government whatsoever, the CRA will likely see this method of tax filing less favorably than filing your withdrawals as capital gains. What about claiming it as foreign currency? In your tax return, there will be a form called a T1135. This is a statement of foreign property held. If the cost base of your crypto assets is over $100,000, you will need to fill out this form. Typically, the CRA defines foreign assets as those not held within Canada (typically, not Canadian property or within a Canadian bank account). Rather than face the music when legislation is revealed, we are encouraging all clients with a cost base of over $100,000 to fill out this form. If you are a client of Metrics, it will be filled out as part of your services.
WHAT IF I MINE CRYPTOCURRENCY? Unfortunately, the profits from mining cryptocurrency will likely have to be taxed as income. There are some sources online claiming the CRA has considered mining as a hobby. Even if this turns out to be untrue, the CRA considers a business to be any activity you do for profit. With this definition in mind, we feel that cryptocurrency miners will be safest declaring profits as income, which means some costs can be claimed as a business expense, which any miner should consider claiming to reduce his or her tax bill. If you are a small hobbyist miner, declare the income when mining profits are withdrawn into fiat. Be sure to keep record of which withdrawals are a result of mining proceeds versus investment capital. If you haven t thus far, it might take a bit of time piecing together various transaction histories, but it should be possible. The income will be declared at the same date on which you received the payout (in crypto), and this will also set your cost base. If these assets increase/decrease in value between when you receive them and when you sell them, the difference of the cost base and sale price would be a capital gain/ loss at time of sale.
CONCLUSION For most Canadians who do not trade for a living, you are expected to pay tax as a capital gain. If you spend a significant amount of time trading and analyzing the markets without holding long-term, you may be required to file your gains as income. Currently, there are no distinctions and all crypto-assets are treated equally in regard to profits made from the activity. In the future we may see distinctions between cryptocurrencies, crypto-commodities, cryptosecurities and other digital tokens when it comes to tax. The Swiss regulatory authorities released differentiations on types of tokens, defining payment asset and utility tokens. We can likely expect a similar classification from the CRA in 2018. Since cryptocurrencies are not considered a legal currency in Canada, all payments made using bitcoin or other cryptocurrencies are considered barter transactions and the tax implications are derived from the fair market value of the barter. Although mining may be viewed as a hobby, the CRA considers any profit-making activity a business and as such, the hobbyist miner should claim the miner and all associated costs as an expense and claim the net income as personal income. For those who pay in cryptocurrency or donate their virtual currencies, you will quote the fair market value of the cryptocurrency in Canadian dollars and will be required to pay tax (or receive a tax credit) based on the value at the time of the transaction.
CLOSING REMARKS KOI Gains are not realized until they are converted back into Canadian (fiat) currency so any amount held in cryptocurrency is viewed as a commodity and is irrelevant until it is realized as a capital gain or income. Blockchains operate globally so we need to be reasonable with our regional tax laws. We have already seen companies like RightMesh here in BC move their ICO headquarters to Switzerland to avoid regulatory uncertainty this is not a trend we want to see continue. Regulators should not hinder innovation by complicating our tax laws or failing to provide regulatory clarity. METRICS Gains are taxed on every crypto-crypto and crypto-fiat transaction. Since all cryptoassets are classified as commodities in Canada, it is required to report each commodity-tocommodity trade and any capital gains before you convert back to fiat. As mentioned, the laws for taxing cryptocurrency gains are not clear. For most Canadians who do not trade cryptocurrencies for a living, you are expected to pay tax as a capital gain. Regardless of which category you fall into, it is always a good idea to keep a history of your transactions. We recommend downloading your trading history for 2017 from all exchanges used and keeping these records in a folder on your computer. Disclaimer Laws are expected to change and regulation is inevitable. As always, chat with a tax professional to be sure you re complying with tax regulation. This article is meant to provide general informational guidance on treatment of tax regulations as currently provided. It does not constitute consultation nor individual situation assessment or application of rules to individuals.
THIS DOCUMENT WAS CREATED BY: Connor Brooks Co-Founder, Head of Product - KOI Kyle Mackenzie CPA PARTNER, CTO - METRICS Koi Research Group is a team of educators who teach and consult clients worldwide. Serving individuals and institutions, some of our clients include universities, tech accelerators, private businesses, and everyday investors. Whether you are educating yourself, need a speaker at your event, or would like to educate your employees on blockchain, Koi can help. Metrics is your online accounting advisor. A combination of technology and an experienced CPA team will guide you through complicated tax situations to help you optimize taxes for yourself or your business. Taxes made simple. If you are looking for advisory related services for corporate blockchain ventures or cryptocurrency taxation, get in touch. info@koiresearchgroup.com info@getmetrics.ca