Now that you’ve invested in a bunch of crypto currencies, and have tons of profits, how do you report those profits to CRA?
The way you report your profits to CRA and potentially pay your taxes depends on the nature of your crypto profits. In most ways, profits you make from crypto currencies should be reported in the same way as you report your other foreign currency profits. Most Canadians have US dollar investments such as stocks on the NYSE. When you make a capital gain on a stock denominated in a foreign currency, you should be reporting the gain to CRA including the foreign exchange portion of the gain. When a US stock pays you dividends, you should apply an average exchange rate for the year to those dividends (assuming those dividends were also earned throughout the year).
The same is true of reporting your crypto currency gains. If you make a taxable profit denominated in a crypto currency, you should apply an exchange rate to those gains in order to report those gains in Canadian dollar terms.
Different types of taxable profits are reported differently, but regardless of the type of gain, you should report bitcoin and other crypto currency gains in the same way as you report your other foreign currency gains.
The bottom line with reporting all taxable profits is you must keep good reports. Keep accurate and detailed records of all transactions including buys & sells, as well as distributions such as dividends & interest you receive.
Capital Gains
Say you buy $1000 Canadian dollars worth of bitcoins in your personal name since you are speculating the value of bitcoins will rise. In a few year’s time, it turns out your bitcoins are now worth $5000 Canadian dollars. You decide to sell your bitcoins and realize the capital gains. Your capital gain is calculated as the amount you realized on the sale minus your cost base ($5000 – $1000 = $4000). You should report a $4000 capital gain for the year you dispose of your bitcoins. Since the purchase and sale was done in your personal name, the amount of tax you owe will be based on your capital gains tax rate.
If you buy and sell frequently/regularly throughout the year, you can still report your gains as capital gains, but depending on your situation, CRA might deem your trading to be your primary activity, in which case your gains/losses will be categorized as regular income and taxed at your marginal rate.
Whichever way you report your capital gains, make sure to keep good records, and include all your costs and taxable benefits as part of your return.
Income
Let’s say you lend bitcoins and receive interest in return. This could happen if you lend your bitcoins on a P2P network, a margin lending site such as Poloniex and Bitfinex, or if you make another arrangement to earn interest on your bitcoins. In this case, if the income is passive in nature, you should report your income gains as investment income on your tax return. This is the same as earning interest from a bond or passive rental income. The tax on these profits will be at your highest marginal rate.
I think its fair to consider the income you may earn from bitcoin investments as active income since there is a high degree of operational risk and work involved in earning crypto currency interest. So consider classifying your earned crypto income as business income.
If your crypto interest was received throughout the year, apply an average exchange rate to determine the value in Canadian dollars. To find an average exchange rate, you will need to search online for a credible source. As long as the rate is within reason, CRA is happy. For example, take the exchange rate reported on the first day of each month from your favourite exchange, then compute the average rate from this series, and use this rate as your average annual rate and apply it to the income you received to determine the value in Canadian dollars.
Mining
Any income you earn from mining crypto currencies should be reported as active business income. Unless you are investing in a mining contract with a 3rd party (such as Genesis Mining), when you earn mining profits, this is active income. When you report this income, if the income you received came throughout the year, you should apply an average exchange rate to that income to determine its value in Canadian dollars. For example, if you earned 1 bitcoin per month throughout the year from mining, and the average exchange rate was $3000 CAD/BTC, then the taxable income you earned was $36,000 Canadian dollars. Don’t forget to record and recognize any costs associated with earning this income.
What is Fair?
It is becoming common to accrue annual gains from foreign currency investments based on their currency market values (in Canadian dollars) and report those gains on an annual basis. This is because CRA is more concerned about Canadians who have offshore investments and whether those tax payers are paying tax on their worldwide income. They would rather you pay taxes on your unrealized gains each year to prevent you from delaying those taxes. My suggestion for the average Canadian bitcoin investor is to recognize their gains for tax purposes when those gains are brought back to the Canadian economy (when Canadian dollars hit your bank account again). For most people, profits from crypto currencies will represent a small portion of your taxable gains. If you make a lot of gains from crypto currencies, consult a tax advisor and get in front of the issue.
