Series I: Current status of taxation of cryptocurrency in Canada

At present, the Canada Revenue Agency (CRA) has clear regulations on the taxation of cryptocurrencies, which includes provisions on taxable entities, tax obligations, income types, and tax calculations. Its concept and basic logic on cryptocurrency taxation have a certain reference value for the formulation of cryptocurrency taxation laws in other countries.

Ⅰ. Taxation definition of cryptocurrencies by the CRA

The CRA believes that Canadian tax residents have tax obligations for cryptocurrencies, but they do not consider cryptocurrencies as legal tender and they do not have fiat currency status. However, regulatory authorities view cryptocurrencies as commodities under income tax law and require taxpayers to comply with reporting obligations in a timely manner. At present, mainstream academic research on cryptocurrencies also views them as having both monetary and commodity attributes. Due to the legal status restrictions of fiat currency, the external form of its monetary attribute is subject to various constraints. However, the commodity attribute can be fully reflected in various circulation channels, while also generating economic taxability.

Currently, taxpayers in Canada engaging in cryptocurrency trading may earn profits classified as either capital gains or business income, and losses correspondingly as capital losses or business losses, distinguishing between the capital and operational nature of the trade activity. Additionally, since cryptocurrencies are not legally exchanged for fiat currency, but have commodity attributes, the unique trading model of “bartering” is also widely used in circulation, creating a new taxation model.

Furthermore, the CRA does not impose any tax obligations on taxpayers who hold cryptocurrencies, but tax obligations arise when gifting, selling, exchanging, converting or paying with cryptocurrencies, and relevant taxes must be paid.

II. How does the CRA collect taxes related to cryptocurrencies?

The legislation has determined that cryptocurrencies can be taxed, and it is a topic worth studying how regulatory authorities quantitatively collect taxes. The important prerequisite for taxation is first determining how to quantify the tax value of cryptocurrencies.

1. Consistency in value calculation methods

The CRA requires taxpayers to use reasonable methods to calculate the value of their cryptocurrency transactions. Generally, the fair market value is the highest price that informed persons would be willing to pay for it. Canadian taxpayers need to keep records of how they calculated it, as this will allow them to prove their logic to the CRA when necessary. Taxpayers should also be consistent: if using a quote from a trading agent once, they should always use data from the same agent. Or, if a taxpayer uses an average once, they should continue to use the average.

2. Determination of business income and capital gains

Profits generated by cryptocurrencies are classified as either business income or capital gains, with corresponding tax obligations being opaque. Currently, the CRA classifies the following cryptocurrencies as business income: those with a profit motive (regardless of the likelihood of short-term profitability), products or services that are promoted, activities conducted for business reasons in a commercially viable manner, and activities completed “in a business-like way” (such as acquiring inventory or capital assets or developing business plans).

Transactions with more apparent operational attributes generate profits through regular business operations rather than pursuing short-term capital excess returns, so such trading profits are generally considered business income. Conversely, Canada taxes cryptocurrencies as capital gains under the following circumstances: they are not sold for business revenue, and someone profits from selling it; the transaction itself has a capital gain-seeking motive, seeking short-term profits.

3. How are specific cryptocurrency transactions taxed?

Intraday cryptocurrency trading: the CRA classifies intraday trading as business income. Therefore, taxpayers’ net profits from intraday cryptocurrency trading, minus their net losses, must be reported on their income tax return.

Mining cryptocurrency: mining refers to a person using a computer to complete mathematical problems and confirm cryptocurrency transactions. How this is classified depends on whether mining is a business or a hobby. In the case of hobbyists, capital gains tax must be paid. The cost basis is zero and the CRA does not allow deductions. In business cases, it is considered inventory. This requires valuing cryptocurrencies at their acquisition cost or fair market value.

Holding cryptocurrencies: Canada does not levy any taxes on cryptocurrencies held by taxpayers.

Transferring cryptocurrencies between wallets: when someone transfers their cryptocurrencies between two wallets, exchanges, or accounts, no taxes are required.

Purchasing cryptocurrencies: purchasing cryptocurrencies is also not taxable. That is to say, anyone who purchases cryptocurrencies with the intention of holding them should keep accurate records. The value at the time of purchase is necessary for calculating the cost basis when selling cryptocurrencies in the future.

Selling cryptocurrencies for fiat currency: when someone sells cryptocurrencies in exchange for Canadian dollars or other legal tender, this is taxed as a capital gain. Each type of cryptocurrency must be listed separately and the purchase and sale prices must be used to calculate the cost basis.

Selling one cryptocurrency for another: This is also taxed as capital gains. To calculate the value of a cryptocurrency at the time of sale, you need to look at the value of the cryptocurrency being sold. As an example, consider someone buys 1 of Crypto A for $100 (CAD). Then, a few months later, they exchange it for 3.0 of Crypto B. When calculating the capital gains, look at the value of the 3.0 of Crypto B at the time of the exchange. Assuming it was worth $200, the person would report a capital gain of $100 for Crypto A.

Using cryptocurrency for purchases: The Canada Revenue Agency considers using cryptocurrency to purchase goods or services as a barter transaction. Like selling one cryptocurrency for another, they must determine the value of the goods or services purchased using the cryptocurrency and count it as the amount sold of the cryptocurrency.

Earning cryptocurrency: Those who earn cryptocurrency through work must report it as income.

Series 2: Thoughts and Analysis on Canadian Cryptocurrency Taxation

The Canadian Revenue Agency has clarified the tax payment process for cryptocurrencies, divided the nature of trading profits and made preliminary regulations on value calculation methods. These guidelines can provide valuable reference for cryptocurrency taxation in various countries.

1. More obvious commodity attributes in tax treatment

After years of development, cryptocurrency has both obvious monetary and commodity attributes, which require different taxation treatment. While cryptocurrency functions as a currency for transactions, circulation, and payments, the conversion between cryptocurrency and fiat currency is usually strictly prohibited to protect the security of fiat currency payments and maintain financial stability in the jurisdiction. However, when taxpayers use cryptocurrency to purchase goods or services, it essentially plays the attribute of currency, but it will still be considered as barter for tax purposes, i.e., the taxpayer exchanges a certain valuable commodity for another kind of service or commodity, which should be treated as sale for tax purposes. Although cryptocurrency is essentially a currency in this scenario, legal restrictions will likely result in taxation treatment that emphasizes its commodity nature.

2. Classification of Transaction Profits

All income needs to be classified into corresponding categories for taxation purposes. Whether the profits from cryptocurrency trading are considered capital gains or business income will have different implications for the legality and fairness of taxation. According to international experience, future taxation trends in other countries will likely follow the Canadian Revenue Agency’s approach of classifying transaction profits as capital gains or business income based on their nature.

For taxpayers engaging in daily, repeatable transactions with stable profit margins and long profit cycles, their transaction profits are usually considered business income, which is a positive income and subject to lower tax rates, such as daily cryptocurrency mining. For taxpayers engaging in non-daily transactions with large excess profits and short profit cycles, their transaction profits are usually considered capital gains, which is a passive income and subject to higher tax rates, such as cryptocurrency trading on the secondary market.

3. Determination of Value Measurement Methods

Due to the large fluctuations in the market value of cryptocurrency and the short valuation demand cycle, even after the implementation of cryptocurrency taxation, determining the value of taxable objects remains a challenging technical issue for tax authorities. Traditional asset evaluation methods are not applicable in the cryptocurrency industry, as the fair market value of cryptocurrency is constantly changing, and the value corresponding to each tax liability event is different. Additionally, how taxpayers calculate the cost of acquiring cryptocurrency, whether using the first-in, first-out method, last-in, first-out method, or moving weighted average method, will also pose challenges for tax authorities. The current approach of the Canadian Revenue Agency is to empower taxpayers to use their own reasonable value confirmation methods, ensuring consistency in calculation logic between income and cost, and thus achieving relatively consistent taxation of the value-added portion in capital gains taxation. For business income taxation, it is also necessary to consider how much production factors and expenses related to the production and operation activities have been invested by taxpayers in the process of generating business income, and to calculate the corresponding production costs for pre-tax deductions in order to achieve fairer taxation.

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