Crypto Income Taxes In Canada 2022

Well, once the euphoria or panic has finally settled in, it's time to face reality. You live in Canada and the CRA wants a piece of your efforts. It's highly recommended that you adequately keep track of your cryptocurrency trades. I don't know. Will likely not stand as a plausible defense. What's also really important to understand is that the income tax system is designed by the CRA and primarily designed to serve the the cra.

If you're watching this video in 2022, 2021 was a pretty eventful year for you when it came to your cryptocurrencies. Maybe you bought bitcoin at its lows this year and then you sold it at the highs, so you probably made a lot of money. Or maybe you've sold bitcoin at the lows and then you bought it back at the highs and lost a lot of money. Did you have diamond hands? Or maybe you had paper hands? The fact of the matter is that cryptocurrencies and NFTs certainly have had a roller coaster of a year. And with all of the attention placed on cryptocurrencies right now, you can probably say it's one of the greatest sweepstakes. And the feelings of fomo, the fear of missing out is quite high. Well, under these circumstances, you can either earn a ton or flame out, and most of the time the ones who make a ton of money are the ones who are heavily sensationalized, while the ones who flame out, well, you never really hear about them. So you're probably watching this video because it's around the time for you to file your taxes. Well, once the euphoria or panic has finally settled in, it's time to face reality. You live in Canada and the CRA wants a piece of your efforts. When it comes to matters of the digital world, it's most certainly a controversial topic right now. And that's not what the topic of my video is about today. And what we're going to go through. This video also isn't meant to dive into whether or not cryptocurrencies are the next biggest thing. You're actually going to watch this video because what you're probably wanting to know is how you are going to be taxed when it comes to your cryptocurrency. Well, what I'm going to be talking about is going through an overview of the current environment for cryptocurrencies, shedding the light on the perspective of how the CRA interprets what happens to cryptocurrencies I'm also going to share some guidelines to you from my professional standpoint when it comes to the interpretation of what the CRA calls virtual currency.

This is you. You work hard for your money and you get paid $100,000 annually. And this is paid to you in fiat money. But we all know that this is not the money that you get because your money gets sent to two places. The first is your money gets sent to the CRA for taxes.

What's left gets deposited into someone else's bank. From there, you send your money away by paying your bills. And whatever's left from that, you save it because someone else's bank pays you absolutely nothing for keeping it there. You put your money at risk by investing it into cryptocurrency, hoping for a high return. Fortunately, your cryptocurrency investment profited and earned you some income. Because of your efforts from that profit, the CRA also wants their share of your profit. So they ask you to find some fiat money to pay your share of taxes. You angrily convert your earnings into fiat to pay for your taxes from your cryptocurrency profit. Even though you make $140,000 a year, almost 60% of your money in the form of bills and taxes went to someone else, while you receive only 40%. You are the one taking all the risk, doing all the work, but someone else is getting most of your money. Does that seem all right to you? I want to say that for matters that I'm about to share with you, this is an area that is actively evolving. Cryptocurrency is very much an emerging technology, and the information that I'm sharing could very much change, especially as the CRA gets a better handle and understanding of the economics of cryptocurrency. If you've watched my video on income taxes in Canada, you'll realize that the CRA is the one who makes the rules and they can change it at any point in time. Furthermore, people who are rapidly adopting this digital environment is also very much evolving and changing. So it's important for you to understand that this is a dynamic and ever changing landscape. So everything in this video that I'm about to share should only be considered for research and educational purposes only. This is not advice. It's important you speak with a professional who is actively involved in this space, who has a clear understanding of the taxation rules in Canada. And lastly, can put together and understand your personal circumstances. Now, whatever your personal motivations and beliefs are with the virtual currencies today or tomorrow, we're currently still operating in primarily the fiat money system. Whether you are on the fiat money based system or on the virtual currency system, nothing is going to replace the need for banking. So instead of leaving your money in someone else's bank, wouldn't it make more sense for you to take control of your own banking function? Unless you feel comfortable with our current banking system, the central bank and the Canadian government calling all the shots, then this all starts with learning more about the process of banking. And after you finish watching this video, please make sure you visit watchibc.com if you want to learn more about the process of banking. For today's video, I'm going to open the backstage curtain on how the CRA learns and knows about the digital world and how they are taxing. What you're also going to learn are common examples that you may face so you can see how you would be taxed. So please make sure you stick through to the end of this video. The first system I'm going to talk about is the system in which the CRA operates on. So in the eyes of the cra, everything must gravitate back to the fiat money system. Whether you are using the barter system or whether you're using the digital system, their basis of determining how to tax you will be primarily in the fiat money system. Why? I mean, what my thoughts on this is that all of their current resources and infrastructure has been developed and enhanced based on the fiat money system. As of now, the current authoritative system is the fiat money system and the basis of transactions known as the medium of exchange is still the fiat monetary system. Anything else would be considered a speculation and it falls out of the fiat money system, which in general is where the crypto and digital environment is currently standing. So the big conclusion here is that when you are paying your taxes as it relates to your cryptocurrency, it has to be done in fiat currency, not cryptocurrency. This means that your cryptocurrency gains, irrespective of how you fund and pay your tax bill, will need to be converted if you only have cryptocurrency and be paid into the fiat currency. What I want to say very clearly is that what I'm about to say is for you to pay taxes and I'm not advocating for you to evade taxes because that's illegal under the Income Tax Act. What's really important to understand is legally any transaction, whether it is barter, fiat crypto, needs to be tracked, documented and reported to the cra. The reality is that with the emerging technology of blockchain and it allows transactions to be documented, audited, tracked much more clearly. Transactions that were relied upon in the bartering system are much more difficult to track and especially support with proof and enforce. They're also much more difficult and unresourceful for the CRA to investigate and enforce now compared to those that are transacted via the blockchain. Transactions on the respective blockchain have unique identifiers and timestamps and a myth I would challenge that people purport about cryptocurrency is that are that transactions are completely anonymous. I would very much disagree with this depending on the perspective that you are looking at. If we look at the perspective from what I can share with you, that at least in terms of my long experience as an auditor in my past life, auditing transactions, identifying the parties, the nature of the transaction, the amount and your activity can easily be traced identified because of the tags attached to all of that information in a transaction. If I was an auditor, my life would be so much easier. Tracing the source of the transaction and understanding the circumstances around it now, coupled with the know your customer process that a lot of the exchanges have to undergo for regulation, they have collected information about you. So this represents the single largest point of entry where it opens the door for regulators to have potential visibility to everything that you do. So now that I've caught your attention to the importance of filing your cryptocurrency gains and losses, make sure you visit my video on understanding the basics of personal income taxes in Canada. If we look at the methodology on how the Income Tax act is designed, the essence of the design is to tax you on your activity, activities and your efforts. When the CRA does not have the visibility to your activities and your efforts, it's very much more difficult for them to enforce on those actions. What's also really important to understand is that the income tax system is designed by the CRA and primarily designed to serve the cra. So hopefully now you understand the system, let's dive into the actual nuts and bolts. So to make sure you are compliant when it starts with understanding the nitty gritty, let's look at how the CRA defines cryptocurrencies. Well, the CRA generally defines cryptocurrency like a commodity. For purposes of the Income Tax act, any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on your circumstances. Now you are required to report to the CRA if you've disposed of any Cryptocurrency. This basically means that you have either sold or transferred your ownership in crypto in exchange for fiat, whether it be US Dollars or Canadian, exchanged it for altcoins, or even in exchange for goods and services. What's also important to understand is financial institutions such as banks do not recognize cryptocurrencies. And this is pretty logical because they operate primarily on the fiat money based system. So your cryptocurrencies must be held in unregistered accounts with the cryptocurrency exchanges. So you will not be able to have them housed inside accounts like TFSAS or RRSPs to shelter the growth of them. Now we understand how the CRA defines cryptocurrencies, let's figure out how it's valued. So the value of cryptocurrency transactions. Where a direct value can't be determined, the CRA says that you must use a reasonable method, judgment applied here. What I'd encourage is for you to keep records to show how you figured out that value. Generally, the CRA's position is that the fair market value is the highest price expressed in dollars that a willing buyer and a willing seller, who are both knowledgeable, informed and prudent, and who are acting independently of each other, would agree to in a open and unrestricted market. For example, you could choose an exchange rate taken from the same exchange broker you are using, or you can take an average of midday values across a number of high volume exchange brokers. Whichever method you choose, you have to use it consistently. Now, if you hold more than one type of cryptocurrency in a digital wallet, each type of cryptocurrency is considered to be a separate digital asset and that must be valued separately. So for example, if you hold Bitcoin, the value of Bitcoin is valued separately from the value of Ethereum. You can't combine both of those values together and call it your digital assets. So now you know the basic stuff of the definition and how the CRA values cryptocurrency. Now let's talk about the transaction. And so the next thing that needs to be determined is if you are disposing your cryptocurrencies, how are they being classified? And in the CRA they're either classified as business or capital. I do explain a lot more in a lot more detail about the personal income tax system in Canada from a personal standpoint. And so make sure you watch the video for me about that, that topic of income tax, personal income tax systems in Canada. What I do talk about Specifically is that different income sources attract different tax rates and therefore also tax rules. Additionally, how the Income Tax act is designed, it is designed as a progressive tax system. So the more income you earn, the more taxes you will pay. When it comes to the distinction between business income and capital gains, the differences are huge. Because business income is included in your income at 100% less any allowable expenses, which can help reduce the amount of taxes you pay, while capital gains are only taxed at 50% of the value. Similarly, if earnings qualify as business income or as capital gains, then any losses are also distinguished by what's called business losses and capital losses. Capital losses are restricted to be only used on capital gains. So not only is the income type very important to distinguish, how you distinguish your losses are also very important because when you have losses, the key takeaway is that business losses are much more flexible for you to use compared to capital losses, where capital losses are more restrictive, more restrictive for you to use. Capital losses can only be applied to capital gains. Business losses can be applied to business income and capital gains. Business losses are therefore considered much more valuable because of their flexibility of use. So when it comes to determining whether something is business or a capital asset, I'll use a very simple example. You are person A and you have multiple trees that produce fruit for you. You sell the fruit to generate the income. Well, in this example, the tree would be the capital asset and the fruit would be the business income because the fruit was what was generating the income for you. Now, when your income is considered business, any expenses that you've incurred to generate that income, for example, the cost of water that you use, the labor and tree nourishments can be deducted against your business income to lower the taxes you would pay on this income. In this circumstance, this is where judgment is applied. Fruit selling is a commercially viable business for you, meaning that's how your business survives. And if you sell the tree that produces the fruit for your business, that would be considered capital. So you sold the machine that created the income free.

Now, when it comes to the losses, if your expenses cost more than your income from selling your fruit, you would have what's called business losses. If you sold the tree for less than your cost of buying the tree, you would have what's called a capital loss. Now, in a separate example, let's assume you are person B and you have multiple trees similar to earlier that also produce fruit. But the way you generate your income to be a commercially viable activity and is not from selling the fruit, rather it is from Selling the trees. In this particular set of facts, selling the trees is considered business income, not capital. So according to the cra, taxpayers have to establish if their cryptocurrency activity results in income or capital because this is going to affect the way the revenue is treated for income tax purposes. Not all taxpayers who buy and sell cryptocurrencies are carrying on business activity. So let's work through a few common examples. Now, I want to make sure that you recognize the examples I'm going to use here are for illustrative purposes, and there are some judgments that I am going to apply in the real world. We know that it doesn't work in such clear cut circumstances. So differences between determinations can exist. And this is very much dependent on the set of facts collected. An experienced professional will ask you very thorough questions to understand and gather the facts before expressing their recommendation to you. Now, what you're going to see in front of you is an income tax calculator with an example and these income tax calculators, you can simply find one of these on the Internet, and I recommend that you choose one from a reputable source. What's important to understand is that though these tax calculators, they aren't meant to precisely calculate the taxes you would owe to the government, but it can be very helpful for your planning purposes for you to get an idea of the tax implications on the decisions that you make when it relates to income. Let's walk through the examples. Let's walk through an example here using Janus. Well, Janice has a salary of $100,000, which she normally has and she incurs as business income. Well, the next thing is Janice regularly buys and sells various types of cryptocurrencies. She pays close attention to the value of the cryptocurrency, and she intends to profit from those fluctuations in the prices of the cryptocurrencies. While her activities are consistent with someone who is engaged in the business of day trading. So if we take a look at the amount of cryptocurrencies that she sold, she sold for 340,000, which she originally bought for 200,000. So her profit here would be 140,000. And under the facts that I've shared with you, that definition would be considered business income, and that would be $140,000. So let's just walk through a very quick example using a tax calculator that you see on the very right side. I'm using Ontario as an example. And so I would just put in $100,000 as employment income And I'm just assuming it's personal and it is not in a corporation. So the income that she's traded and earned 140,000 in profit, I would add that 140 here and now I can estimate what her taxes are going to be. So her income for that year is $240,000. And, and then in terms of taxes, she would pay 93,004, 83 in taxes, which 55. 180 went to federal, 34 went to provincial, 4 went to CPPEI. So after she pays her taxes, she actually has 146,005 17 as after tax income, which essentially is about 40% of her. Her earnings went to go pay taxes. So let's use our second example. And in terms of showing a capital gain and we're going to use Tim as so and then we're going to use Tim as the example. So Tim found a deal on a living room set at an online vendor that accepts bitcoins. Well, Tim acquired $3,500 worth of Bitcoin, assuming his salary is also $100,000. By the time he bought the furniture and converted his remaining bitcoin back into fiat money, the value of Tim's bitcoin increased by 500. So he sold it for $4,000 from when he sold it at $4,000. The profit on that sale would be $500. And therefore the total taxable capital gain is $500. And because of the rules around the capital gain, you actually have to pay 250. The taxable basis is 250. Now if you use one of the tax calculators that I'm going to share with you that I show you here. So now I'm just going to put the 500 capital gain. And the good part is these capital gains, they will already consider the taxable portion, which is the 50% of it. So that's, that's the benefit here. And in that very, in a, in that circumstance, the total income would be considered 100,500, which taxes 27,070 3,307. Average tax rate 2706. And if we just kind of just remember that number I'm just going to write down there, if I just took out that capital gain, we can see the net effect impact that it had.

So instead of that income without the capital gain was 27,084 and then 72, 91 6. So this is originally without the income. And now you can see with that income, this is the incremental tax that needed to be paid, which was about is less than $109. So after going through the examples, the areas that of most consideration would be for you to determine if what you're doing is business income or capital gain. Let's dive into the definition according to the CRA of what a business activity is. Well, according to the cra, common signs that you may be carrying on carrying on a business would be you carrying an activity for commercial reasons and in a commercially viable way. You undertake activities in a business like manner which might include preparing a business plan, acquiring capital assets or inventory, you promote a product or service, you show that you intend to make a profit. And even if you are unlikely to do so in the short term, business activities normally involve some regularity or repetitive process over time. Each situation has to be looked at separately. So very clearly. CRA has described some examples of cryptocurrency businesses and some of these cryptocurrency businesses include cryptocurrency mining, cryptocurrency trading, cryptocurrency exchanges, including ATMs. Now, in terms of mining, mining involves using computers to solve mathematical problems, problems that confirm cryptocurrency transactions, and miners will place cryptocurrency transactions in blocks to guess the number that will create a valid block. Well, a valid block is accepted by the corresponding cryptocurrencies network and becomes part of a public ledger known as a blockchain. And when a miner successfully creates a valid block, they will receive two amounts in one payment. One of the amounts will represent the creation of a new cryptocurrency on the network, and the other amount will represent the fees from the transactions included in the newly validated block. Those who do the mining are paid in the cryptocurrency they are validated. Now the second one or category to look at is also staking or proof of stake. And this is a different process to earn cryptocurrency payments, but may still result in earnings that have tax implications. Proof of stake is an alternative distributed consensus mechanism where a person is selected out of a group of participants known as forgers to validate a block of transactions. So similar to mining, when the selected person successfully creates a valid block, they will receive two payments in one. One amount will represent the creation of a new cryptocurrency on the network, and the other amount will represent the fees from the transactions included in the newly validated block. So the income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity like a hobby or a business activity this is really important that it's decided case by case with a professional. A hobby under the CRA's definition is generally taken undertaken for pleasure, entertainment or enjoyment rather than for business reasons. But if a hobby is pursued in a sufficiently judgment applied, commercial and businesslike way, it can be considered a business activity and therefore it'll be taxed as such. So now you can see it's really important, important to take into consideration with collaboration from a professional who has been experienced in this space to help put together some criteria and parameters and also assess your situation to determine whether or not it falls into a hobby versus a business. So let's walk through another common example that may happen, which is trading one cryptocurrency for another cryptocurrency. Let's go through that example. On July 30, 2020, Stephen bought 100 units of Ethereum, which had a value of 20,600. And for this purchase, Stephen also used 2.5061 bitcoins, which were trading at 8,220 per unit on that day, which is the equivalent of 20,600 under the definitions of the CRA. They're going to consider Steven's transaction as a disposal of bitcoins. Since Stephen originally bought the bitcoins for 15,000 and exchanged them for 100 units of Ethereum at a value of 20,600, it's going to result in a capital gain. So let's walk through an example of this in a little bit of detail. So Stephen, on July 30, 2020, bought, bought 2.5061 bitcoins for $15,000. And then they're going to consider that at once the exchange happens. A sale or disposition of 20,600 for a capital gain of 5,600. Again, assuming no other transactions have happened, this is a capital transaction. So the capital gains are taxed at 50%, and therefore what gets included in income is 2,800. Let's use another example to walk through this. If it was a capital loss, so what would that look like? Well, on July 30, 2020, the same 2.5061 was bought for 25,000. And since the fair market value was sold at 20,600, the capital loss would be 4,400. And capital losses are taxed similarly at 50%, meaning it gets included. It's called an allowable capital loss, but that is 2,200, and it can only be used to reduce income against capital gains. If you don't have any capital gains that you are incurring in the year, you can take that back for three years or you can take it forward indefinitely. So if in the future you have had any capital gains, then you can take this reserve and apply against the capital gains. Also, if you have had capital gains in the past, you can actually take this 2200 and apply it to your previous years, your previous three years of capital gains, and you would therefore also get a refund in the amount of taxes that you would pay for. For this circumstance, let's look at the next way in how the CRA looks at cryptocurrency transactions when it's used as a medium of exchange when you use cryptocurrencies to pay for goods or services, the CRA treats it as a barter transaction for income tax purposes. And a barter transaction occurs when two parties are exchanging goods or service and and carry out that exchange without using legal currency known as your fiat money. When you use it to pay an employee as payment for salary or wages, the amount in Canadian dollars will be included in the employee's income. And this is according to subsection 51 of the Income Tax Act. Cryptocurrencies may be accepted as payment for taxable goods or services, but by a GST or HST registrant. In these cases, the HST and GST rules require that the fair market value of the consideration that was received for the goods or services be determined, and HST and GST or GST gets calculated based on that value. So let's just use a really quick example. A GST HST registrant who accepts cryptocurrency for a movie ticket at their theater would have to determine what the fair market value of the cryptocurrency is at the time of the transaction. The value of the movie ticket bought using cryptocurrency must be included in the registrant's GST or HST return as revenue with the applicable amount of GST and hst. So the amount of revenue and the related GST and HST would be reported in Canadian dollars. And for more information on the tax implications of when a consideration other than money is received for payment, there's actually an Excise Tax act which you can find in section 1531. When it comes to matters related to the to excise tax, make sure you speak with an HST professional when it comes to dealing with exchanges when it comes to dealing with exchanging goods and services for cryptocurrency. So we've gone through a whole bunch of examples of very popular transaction types that can happen with cryptocurrencies. Ultimately the CRA places the responsibility on you to accurately track the information. So just to kind of recap to figure out the value of a cryptocurrency transaction where a direct value is can't be determined, the CRA says you have to use a reasonable method. So the only way this can be justified and supported in case they challenge you is for you to keep records to show how you figured out the value. Now, the ironic part of the equation is that there are a lot of helpful software now for record keeping of cryptocurrency transactions and their associated taxes. But they this is also still a very rapidly evolving and ultimately it still makes it harder because a lot of the transaction softwares that are there is primarily US and not so much Canadian based. So the rules around Canada may still be lacking in those areas. So when it comes to the income tax rules, remember they are designed by the cra and the CRA describes in the act that the responsibility is ultimately held to you, the taxpayer, to support your position when they challenge you. Cryptocurrency exchanges have different standards for the kinds of records they keep and how long they keep them. If you use cryptocurrency exchanges, I suggest that you export information from exchanges periodically to avoid losing the information necessary to report your transactions. And you are responsible for keeping all of the records and supporting documents for at least six years from the end of the last tax year they relate to. You should maintain the following records on your cryptocurrency. The first is in terms of the transaction. You want to have the date, the receipts of purchase or transfers of cryptocurrency. The value of the cryptocurrency in Canadian dollars at the time of the transaction. The digital wallet records and cryptocurrency addresses. A description of the transaction and the other party, even if it is just their cryptocurrency addresses. You also want to have the exchange records. You also want to have capturing the accounting and legal costs and also the software costs related to managing your tax affairs. If you are a miner, a cryptocurrency miner, also keep the records related to receipts of the purchase of cryptocurrency mining hardware. Receipts to support your expenses and other associated records with the mining operations, for example Power costs, mining pool fees, hardware specifications, maintenance costs and hardware operation time. What I also want to mention is the CRA doesn't specifically have any particular software that they endorse for doing all of this. So please be mindful that you can't be as at defense to blame errors or negligence on the software that you use. So you've gone through pretty much this whole video and I want to first make sure and recommend that you at least watch this video multiple times to get an understanding in terms of how the cryptocurrency and how the CRA treats the cryptocurrency. And when it comes time to actual when you are actually going through your own experience through it, make sure you have this video reference as handy and go into smaller segments related to the circumstances that you're going to go through, especially when you're in collaboration with a professional and for yourself. Based on the structure and design of virtual currencies, arguably the transparency will be enhanced that with the CRA's ability to audit transactions in the future, it's highly recommended that you adequately keep track of your cryptocurrency trades. I don't know will likely not stand as a plausible defense. The CRA asks that you retain your records for around six years back to the last filed year. When it comes to business income and capital gains, it's a matter of judgment and it's important you speak with a qualified professional while sharing a detailed set of federal facts for them to help you draw some conclusions. The definition can change based on your circumstances each year and should also be regularly reviewed. The CRA treats virtual currencies as commodities and so if you are in the digital blockchain system as you move within the various system by converting one coin to another, or if you move laterally from the digital blockchain system to the fiat money system, this is going to trigger and result in taxable events that you should again capture the information and ultimately review with a qualified professional. If you use cryptocurrencies to pay for employees, that's going to be included in their employment income. And you would have to follow the same rules as if you were to pay employees in fiat currency. The Income Tax act are laws set by the CRA and these and they set the rules. The system that is designed is to take portions of your income and as your income increases, as do the amount of the taxes that they take. They will tax the source of the money that you have earned, but also the compounding effects of that money. If you notice something was wrong and this frustrates you, I completely understand and I felt the same way. One of the aspects I would recommend you think about is that despite your reasons for getting into cryptocurrency, you'd want to consider taking control of the banking function and controlling the banking process as it relates to your needs. You are already banking with someone else, sending a big portion of your money away while you are getting the smaller portion. A properly designed system can help build your reservoir of money and limit the hands of the CRA from impacting the growth of your money pool. If you really want to learn more, make sure you visit watchibc.com to.