14th February 2018

Tax season is here and Canadians across the country are now filing their returns. This year, as every year, there are of course changes to the tax law. One specific trend that deserves some special attention is cryptocurrency. 2017 saw the boom of bitcoin as the digital currency exploded to a price of over US $19,000 this past December. As many Canadians jumped into the cryptocurrency market last year, and some certainly made capital gains, it is worth noting that these citizens could be liable to pay taxes for their digital transactions using the coins.

The tax implications of cryptocurrency
Many Canadians are unaware that they must pay tax on specific cryptocurrency transactions. Last December, when bitcoin was experiencing its biggest boom yet, Bank of Canada Governor Stephen Poloz commented on the tax implications of buying into the trend.

During a Toronto speech, Poloz said, “Generally speaking, they can be thought of as securities. That means, if you buy and sell them at a profit, you have income that needs to be reported for tax purposes.” 

Does this comment from Poloz mean that everyone who bought bitcoin or another digital currency must pay taxes? The answer is no. If a Canadian purchased any cryptocurrency but has not traded it since, then he or she is not liable to pay tax on it. Only when a person has traded their digital currency for real world dollars or has purchased a product or service using a cryptocurrency are there tax implications.

In 2013, the CRA issued a letter that said digital currencies, such as bitcoin, ethereum and dash, aren’t thought of as legal tenders. Instead cryptocurrencies are thought of as commodities whose losses and gains can be taxed.

“The act of buying bitcoin or receiving bitcoin should not be taxable,” said Lana Paton, Managing Partner of PwC Canada’s Tax Services. “The act of using bitcoin, will be taxable.”

Examples of when Canadians are taxed
If a Canadian bought a bitcoin in 2011 for one dollar and then sold it last December for $18,000, that person will need to declare $17,999 in capital gains.

Another example of when a cryptocurrency is taxable is when it is exchanged for goods or services. If a Canadian bought a bitcoin for $100 dollars in 2013 and then used it to buy a used car last year for $8,000, that person would have to declare a capital gain of $7,900. The bottom line is, any gain, whether it’s a few pennies or thousands of dollars, is subject to tax.

Fees should also be considered when it comes to cryptocurrency. Transaction fees, which reached a high of $55.16 last December, can also add to the loss, or reduce the gain.

Are cryptocurrency miners subject to tax liabilities?
The unprecedented rise of cryptocurrency value last year was also accompanied by another trend: mining. Mining is the process of using computers to help process digital currency transactions. For performing this task, miners are rewarded with cryptocurrency.

Gains that miners receive are also subject to taxes, but they can deduct expenses related to the cost of computers and electricity that are necessary to mine.