In 2019, more Canadians searched for “Bitcoin” on Google than “Kim Kardashian.” Bitcoin awareness jumped by almost a third in the same timeframe, with more than 8 in 10 Canadians claiming at least some familiarity with bitcoin. This increase in curiosity has led to an increase in curious purchasers. In fact, almost four in ten Bitcoin users purchased Bitcoin for the first time to “give it a try”. Proverbial dead cats aside, curiosity is a fantastic driver of the adoption of new technologies. Nevertheless, Canadians should take the time to inform themselves of the possible legal consequences of their ownership of bitcoin and other similar cryptocurrencies.
One such area that might be piquing Canadians’ curiosity at this time is the tax consequences of their cryptocurrency ownership. Although other government bodies have adopted a “wait and see” approach to the emergence of cryptocurrencies and other ledger backed digital assets, the Canada Revenue Agency has been quick to ensure that there is no grey zone in what you owe the taxman.
In 2014 the Canadian Revenue Agency (CRA) issued guidance on the taxation of cryptocurrency. Notably, the CRA labels cryptocurrency as a commodity, therefore, classifying cryptocurrency as a capital asset. In classifying cryptocurrency as a commodity, taxpayers and cryptocurrency exchanges are now subject to certain reporting obligations.
We’re hoping to shed some light in this article with respect to the reporting requirements for Canadians: (1) taxpayers who bought, sold, or traded cryptocurrency; and (2) cryptocurrency exchanges who facilitated the sale of cryptocurrency.
Canadian Taxpayers Cryptocurrency Reporting Obligations
If you bought, sold, or traded cryptocurrency for any purpose other than for a business (See CRA tax regulations on business income) then it is considered a capital asset. If the sale of a cryptocurrency is more than the purchase price or its adjusted cost base, then the taxpayer realizes a capital gain.
Capital gains are included in income for the year, but only half of the capital gain is subject to tax. Capital losses resulting from the sale can be offset against capital gains, but cannot be used to reduce income from other sources, such as employment income. Capital losses may be carried forward into future tax years indefinitely and carried back for up to three years if you do not have any capital gains against which to offset the losses.
If you have capital gains for the taxable year then the gains must be reported on the Schedule 3 tax form.
Cryptocurrency Exchanges Reporting Obligations
Clarifying that cryptocurrency is taxed as a commodity imposed additional reporting requirements on cryptocurrency exchanges that facilitate cryptocurrency to Canadian users. The CRA requires cryptocurrency exchanges to file a T-5008 for “every trader or dealer in securities who buys a security.” For the T-5008 information return, securities include “any property including any commodity.”
Because cryptocurrency is classified as a commodity, and the definition of securities includes commodities, exchanges must furnish its users with T-5008 tax forms. Canadian cryptocurrency exchanges must issue T-5008 tax forms by the last day of February for every person who traded on their platform, as well as a summary of how many T-5008’s they issued.
Canadian cryptocurrency exchanges that fail to issue T-5008’s to their users may be subject to hefty penalties.Exchanges that have more than 2,501 users are subject to penalties of $2,500 for each T-5008 they fail to file.
The hefty penalties for failing to issue T-5008 tax forms to Canadian cryptocurrency users can threaten to bankrupt even the largest exchanges. Because cryptocurrency is classified as a commodity, it is imperative that exchanges comply with their reporting obligations.
Though folks may feel that such requirements are overwhelming, especially for the novice cryptocurrency owners, with the help of technology and automation, such reporting requirements become quite easy to manage, especially for professionals deeply embedded in the blockchain sector.
Canadian law firm Renno & Co specializes in blockchain-focused businesses and helps them conform with the legal technicalities involved in the industry. TaxBit specializes in automating tax reporting for cryptocurrency exchanges, including the proper production of Canadian T-5008 tax forms, and employs tax attorneys and CPA’s to ensure proper compliance. TaxBit and Renno & Co stand ready to help with any blockchain or crypto tax-related matters that your business encounters.*
Written by: Cryptocurrency Tax Attorney Justin Woodward and Canadian Emerging Technologies Attorney Toufic Adlouni
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