We're constantly facing new technologies and new ways of doing business, particularly around cryptocurrency. Some of us, including myself, are still learning about this, while others have been investing or mining currencies for a while now. Either way, it’s important to learn and understand our responsibilities when it comes to taxation.

I was fortunate enough to be contacted by a previous guest on I'm a Millionaire! So Now What?, John Oakey. The National Director of Tax Services at Baker Tilly, John offered to share some of his experience of cryptocurrency taxation. His partner in all things crypto, taxation lawyer Myles Bilodeau of Arcus Legal joined us to share his insights around tax planning. They bring over 35 years of combined expertise to the show, and co-authored the 2018 paper ‘Decrypting Cryptocurrency’ for the Canadian Tax Foundation.

They answer questions around cryptocurrency like:

• Is it taxable?

• If it is, what is taxable?

• When do I need to report this to the Canadian Revenue Agency?

According to John, buying cryptocurrency in and of itself is not a taxable event. Even if the currency fluctuates a lot, just holding the coin doesn’t mean it’s taxable –  even if it goes up significantly in value.

“What is a taxable event is when you either sell it, or you exchange it, or if you use it, or gift it. If I gift my currency, and let's just use Bitcoin as an example, that's a disposition. And that's a taxable event. If I exchange my bitcoin for another type of currency, or even a fee of currency, that will be a taxable event. When you have a taxable event, well, that's when you actually have to report something. So, buying and holding, no problem whatsoever, you don't have to do anything. But if you sell it, exchange it, gift it, or you use it to pay for something like a restaurant meal or buying a product on a website that uses the cryptocurrency, that’s a disposition as well. And you have to record that, either on your personal tax return or your corporate tax return, depending on where the funds were invested. And you would have to report that as a capital gain or capital loss.”

Miles mentioned that whether you’re holding on to the cryptocurrency as an investor (for long-term appreciation) or as a short-term profit opportunity is also important. If it’s short-term, the revenue authority treats it more like a business income.

“The Canada Revenue Agency looks for the frequencies of your transaction. They ask: What is the period of your ownership? What is your knowledge of the cryptocurrency market? And how much do you delve into that world? How much time do you spend on a day-to-day basis doing this? If it looks like a business activity, many times it’s treated like a business income or loss to the business income. But if it's more of an investment, where you’re buying to see what it's going to do in the future (long term appreciation) then it becomes a capital gain or loss. This can determine the tax treatment of the asset when you sell it.”

John added that the intention of the taxpayer is also considered, the knowledge that he/she has in the industry, and how the transaction was financed. “The one thing that we don't have yet is any precedent setting court cases in relation to cryptocurrency, like we have with day traders and stocks, or with regards to individuals building buildings, where we look at whether they are building that for long term appreciation or as a business. We don’t have any court decisions where they've applied the same principles to cryptocurrency.”

This episode is packed with crucial information for Canadian investors. We discuss:

• The timing around reporting – and  how long you’re meant to keep records (especially when it comes to proving an adjusted cost base)

• The way the self-assessing taxation system works

• How transferring a cryptocurrency from your wallet into another exchange like Coinsquare or Coinberry is not considered a disposition, but buying Canadian dollars or another cryptocurrency is

• The difficulties of calculating your adjusted cost base across different exchanges or wallets – and that you have to track this!

• That people see crypto as an ‘invisible asset’ but it’s actually treated the same as other assets like stocks or bonds – with the same reporting requirements

• Anonymity or the lack of it: A cryptocurrency task force within the CRA track down people not reporting cryptocurrency – and they can gain access to your information related to crypto trades

“We have third parties that are actually getting your name associated with a wallet address, and when these link up the CRA can start tracing what you’ve been up to. If you transfer cryptocurrency from one of your wallet addresses to another wallet address, they can follow that. And then they can ask you about all of the things that you forgot or for all of the addresses on your Bitfenix address or a printout of your Bitfenix exchange. And then if you transfer that to another wallet, well, you gave them that address too. So, what was once very invisible and anonymous has become very public and easy to trace. And I don't think a lot of people have really turned their mind to that yet,” said Myles.

They share that if you want to get up to date with your taxes or disclose cryptocurrency income, you can visit the CRA’s voluntary disclosure program. With a heap of information to wade through, I think consulting with the specialists might be a little easier.

In this episode, you’ll discover useful information and some trivia too, like the fact that the first Bitcoin transaction traded 10,000 bitcoin for two pizzas! Or that only 900 bitcoin are mined every day, no matter how many miners are on the network…and why.

You’ll learn how Bitcoin mining differs from buying and selling the cryptocurrency and how it’s taxed differently. You’ll find out the difference between mining (active) and Proof of Stake (passive) and how one is seen as a service-oriented business. You’ll hear about the cryptocurrency mining case in the United States where a couple is actually taking the IRS to court because they don’t believe they should be taxed on their newly-minted Proof-of-Stake coins – until they’ve sold them.

Considering that cryptocurrency is only about 12 years old, can you imagine how many more interesting discussions and legislations will happen over the next decade as cryptocurrency becomes even more integrated with our everyday life?

Their fun, frank advice?

Both Myles and John concur that you need to work with an accountant.  Someone who knows what’s going on with cryptocurrency, how the market and dispositions work and who is comfortable giving you input and advice around the legalities. “Cryptocurrency is not an invisible asset, you need to keep records and be on top of it,” Myles added.

On the personal side, John recommended not following fluctuations. “Always accept that you can lose your investment and then how much you put in is your judgement call. It’s going to go up, down and all over the place. With roughly 2 trillion dollars invested worldwide, cryptocurrency is unlikely to disappear. Weak hands sell in a panic and strong hands buy.”

Have a listen!

Want to know more about the taxation of cryptocurrencies? Contact John or Myles to get more insights and advice.

If you’re at the helm of a thriving business or startup, looking to exit, or simply have something to share with the Self-made Nation, do reach out and connect with me. I’d love to hear your story!