Cryptocurrencies, such as Bitcoin, Ripple or Ethereum, are digital currencies, which is – what? Let’s start with what a cryptocurrency isn’t.
It is not a form of Canadian currency (or money). The Canadian Currency Act defines money as coins issued by the Royal Canadian Mint or notes issued by the Bank of Canada. Cryptocurrencies are not foreign currencies either because they are not controlled by any country. The Income Tax Act defines foreign currency as the currency of any country other than Canada.
The Canada Revenue Agency (CRA) treats cryptocurrencies as a commodity, like gold or like a stock investment. Profit made on the sale of your cryptocurrencies are taxed as a capital gain, like any other investment. Only 50 per cent of your capital gains is taxable so if you bought a cryptocurrency for $1,000 and sold it for $5,000, you would report a taxable capital gain of $2,000 (50 per cent (x $5,000 - $1,000).This is virtual currency 101. The following are some key cryptocurrency nuances worth noting.
You cannot trade a virtual currency in your TFSA or RRSP in order to tax-shelter your potential capital gains. For example, you cannot transfer or buy Bitcoins in your TFSA or RRSP account because these digital currencies cannot be bought or sold on a stock exchange such as the Toronto Stock Exchange. Cryptocurrencies operate on their own exchanges such as Kraken, Bittrex or Binance.
Exchanging one virtual currency for another, in order to diversify your risk, for example, is a taxable event. Say you had purchased two Bitcoins at $1,000 each and their value rose to $2,800 each. You played it safe and exchanged one Bitcoin for about 14,000 Ripple when Ripple was 20 cents each. The CRA says you just sold a Bitcoin for $2,800 and realized a capital gain of $1,800 ($2,800 - $1,000). You pay taxes on the profit whenever you swap one cryptocurrency for another, even though you did not cash out the cryptocurrencies.
The tax rules also considered you sold your virtual currency if you used it to pay for goods or services. For example, you realize a capital gain of $4,000 if you bought one Bitcoin for $1,000 and used it to pay for $5,000 of goods when the Bitcoin value was $5,000.
Your cryptocurrencies profits are taxed as a capital gain only if you are a buy-and-hold investor, i.e., you purchased the cryptocurrency as an investment and not a widget to be sold for a quick profit. The CRA may tax your virtual currency profit as a business income if you trade frequently.
There are established factors that determines whether your virtual currency profit is a business profit or a capital gain. These factors include how often you trade, how long you hold your cryptocurrency between trades, your professional knowledge of the market (or lack of) and the amount of time you spend trading. It is a safe bet to say the CRA views your profits as gains, not business income, if cryptocurrencies trading is not your full time undertaking and you are simply dabbling in virtual currency trading.
On related matter, you must complete Form T1135, Foreign income Verification Statement if you owned foreign property or investments with a cost of more than $100,000. Failure to do so could result in a late-filing penalty of up to $250,000. Is cryptocurrencies a foreign investment that counts towards the $100,000 threshold? The CRA says it is.
Therefore if you have cryptocurrencies with a cost (not current value) of $100,000 or more, or if your cryptocurrencies and other foreign properties cost in excess of $100,000, you must file the Form T1135 to the CRA.