Part of your job as an accountant is staying current on industry trends. This includes dealing with cryptocurrency. You need to know what the tax implications are for Canadian taxpayers using cryptocurrency to ensure your clients pay the proper amount of personal income tax.
1) What Cryptocurrency Is
Cryptocurrency is a digital currency that is loosely managed through decentralized peer-to-peer networks and secured through encryption techniques that control the creation of monetary units and verify the transfer of funds. Because cryptocurrency is unattached to governments or central banks, neither the value or quantity can be manipulated by the Bank of Canada or other central authority. For example, the cryptocurrency, Bitcoin, is created using complex mathematical equations, supervised by millions of users called miners, and involves long strings of computer code that have a cash value. Bitcoin is passed from one online wallet to another and stored on a computer or in the cloud. Because bitcoin bypasses traditional banks, it is both unregulated and controversial.
2) Cryptocurrencies Are Commodities in Canada
The Canadian government categorizes cryptocurrencies as commodities and not legal tender. Because cryptocurrencies lack physical substance but hold value, similar to a stock certificate, cryptocurrencies are considered intangible property. As a result, gains and losses on cryptocurrency need to be accounted for in relation to personal income taxes.
3) Accounting for Cryptocurrency in Canada
Taxpayers in Canada have to report cryptocurrency on their personal income taxes. Similar to a stock purchase, when the cryptocurrency’s selling price exceeds the purchase price, there is a gain. Conversely, when the selling price is below the purchase price, there is a loss. Therefore, the cryptocurrency’s purchase and selling prices are established by their value at the moment of the transaction. For example, one bitcoin is purchased on January 1 for $4,000, and a second bitcoin is purchased on March 1 for $12,000. On March 20, one bitcoin is sold for $9,000. The adjusted cost base on March 20 is the average for both bitcoins purchased ($4,000 + $12,000) / 2 = $8,000. On March 20, one bitcoin sold for $9,000, so the gain is $9,000 – $8,000 = $1,000.
4) Cryptocurrency Gains Are Taxable in Canada
Because cryptocurrency is considered a commodity in Canada, it is subject to the barter rules of Canada’s Income Tax Act. Gains are taxed either as capital gains or income. To be considered capital gains, the transaction must be considered a hobby, such as purchasing a long-term investment that will be infrequently traded. Only 50% of the gains are subject to tax. To be considered income, the transaction must be considered a business transaction, such as financing purchases of cryptocurrency with margin or debt. All of the gains are subject to tax.
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