Frequently Asked Cryptocurrency Tax Questions (crypto Tax F. A. Q. ) And Crypto Tax Obligations
Who Needs Cryptocurrency Tax Planning?
If you’ve made a profit through the use of cryptocurrency, you may find yourself wondering: do I need to pay any taxes on Bitcoin and other cryptocurrency? Until recently, the classification of income made from e-currency has been confusing for many people. Should you declare the gains as income or capital gains? If you’re facing similar questions, consider speaking with one of our tax accountant at [email protected]
Bitcoin/Cryptocurrency Accountant & Tax Services
Did you know that Bitcoin transferred as payment for goods and services will be subject to Bitcoin income tax? If your employer pays you using cryptocurrency, you or your accountant must report those earnings on your T4 tax slip. Furthermore, the value of the cryptocurrency is reported as the equivalent CAD dollar amount at the time of the transfer.
Cryptocurrency earnings are also subject to wage withholdings such as EI, CPP and Taxes.
In addition to bitcoin income tax, your cryptocurrency is also a capital asset. Due to the capital asset classification, cryptocurrencywill be taxed as property. Additionally, the government views your cryptocurrency as an investment.
In addition to bitcoin income tax and other cryptocurrency tax services, Cloud Tax Accountant provides tax planning and compliance work for traditional forms of income.
What kind of cryptocurrencies, tokens, and exchanges do you support?
Our crypto tax services encompass a variety of cryptocurrencytypes. For example, we handle cryptocurrency taxes for: Bitcoin, Litecoin, Ethereum, ZCash, Monero, Polkadot, Chainlink, VeChain, Binance Coin, Cardano, Dogecoin, Uniswap, Solana, Polygon, Ripple, Steem, NEO, and Theta Network. We can work with any other altcoins you may own. We support all exchanges.
Which Cryptocurrency Tax Softwares do you Support / Recommend?
We support a wide variety of crypto tax software. The below is not an inclusive list. Your needs and our recommendations will vary based upon your trading style and usage.
- BitcoinTaxes (Bitcoin.tax)
- CoinTracking (CoinTracking.info)
Can you rely on Crypto tax software?
It’s hard enough to calculate crypto taxes, and it’s important to realize that software has limitations. Many programs offer the ability to report your capital gains; however, they do not provide a full explanation of your crypto tax liability. Most crypto tax softwares are not complete solutions and are not without errors. Our accountants specializes in cryptocurrency is much better qualified to assess your liability and ensure an accurate tax calculation. While software alone can seem like a tempting alternative, it will not be the best choice.
Do I need to report mining income?
Yes. You must report mined virtual currency as gross income. Bitcoin/Cryptocurrency taxes are calculated using the fair market dollar value of the coin on the day it was mined.
How do you treat Bitcoin/Cryptocurrency used to pay for goods and services?
The Canada Revenue Agency (CRA) has stated that a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency, measured in CAD dollars, as of the date that the virtual currency was received.
What about the Taxation of Hard Forks, Airdrops, Farming, Halving, &Staking
Like many areas of Cryptocurrency taxation, there is currently no clear guidance regarding the taxation of Hard Forks, Airdrops, Farming, Halving, and Staking.In the absence of clarity, some cryptocurrency accountants believe that there may be no taxable transaction until the cryptocurrency received in the Hard Fork is sold. At that time, a gain or loss is calculated (proceeds from sale less cost basis), which in this case may be zero.
The CRA support this view:
We acknowledge that the temporary treatment may result in capital gain as opposed to ordinary income treatment (assuming the cryptocurrency is held as a capital asset), but by assigning a zero value, it preserves tax on the full value of the forked currency for taxation when the taxpayer sells it.
Conversely, Airdrops are generally viewed as a taxable event upon receipt, and according to the CRA, Canadian taxpayers should report this as ordinary income:
Virtual currencies received from airdrops are akin to a bonus or a free prize. Taxpayers should include the amount as ordinary income based on the fair value of the token on the date of receipt.The income recognized becomes the basis in the virtual currency. The holding period begins on the date of distribution and is the first day of the holding period.
How am I taxed on Cryptocurrency Mining?
Successfully mining cryptocurrency triggers a taxable event. From there, there are two main tax categories which somewhat coincide with whether you mine cryptocurrency as a hobby or a business. Those who are mining as a business can have deductions and other benefits not available to those who mine as a hobby.
Mining as a hobby – “Other Income” treatment
In this scenario, one reports earnings from mining as “other income.” One will not be able to deduct expenses as you can if you are categorized as a business. That said, due to the lack of self-employment tax, taxes should be lower with this second option because cryptocurrency mining earnings are listed as “Other Income” on the tax return (i.e. as a hobby and/or additional income stream).
Mining as a Business
In this scenario, one reports earnings from mining on a T2125 as self-employment income. One will be able to deduct expenses, which they could not do if they were mining as a hobby. Calculating daily revenue can be done through a variety of methods as long as there is consistency. Our team at Cloud Tax Accountant can assist you in reviewing the options.</br >
Don’t forget that you have to take expenses like:
- Depreciation on mining equipment and mining hardware
- Other related expenses
How do I decide if my cryptocurrency mining is a hobby or a business?
Per the CRA website, the distinction between a hobby and a business is a subjective assessment. It is best to speak to one of our tax experts to determine the best and most fitting treatment.
In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity. No one factor alone is decisive. You must generally consider these factors in determining whether an activity is a business engaged in making a profit:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
Overall, if you have a dedicated mining rig and are heavily involved in cryptocurrency mining, then one can assume that they are a business for tax purposes. If the mining is casual on a home PC or existing gaming rig, then one could potentially infer that this was a hobby.
CRYPTO TAX OBLIGATIONS
Are you wondering if you really need to pay Bitcoin/Cryptocurrency taxes or another cryptocurrency taxes, especially if you only made a very small profit? We believe it’s better to be safe than sorry! Although the chances of an audit may be slim for extremely small amounts, the CRA has made it clear that it is serious about crypto/bitcoin tax.
Here are some scenarios to consider:
You sold Bitcoin or Other Cryptocurrency
In the simplest terms, if you sold Bitcoin, it is now considered a capital gain or loss. If you sold the Bitcoin for a profit, it is a capital gain. In this case, you will likely owe the government money. If you sold the Bitcoin at a loss, it is a capital loss. In this case, you will be eligible for a deduction.
You bought Bitcoin or Other Cryptocurrency
This may be the only scenario where you do not need to report your purchase with the CRA. If you purchased Bitcoin and then maintained that holding, you will not owe Bitcoin taxes on the transaction or the currency itself.
You paid for a service with Cryptocurrency
The exact tax status of the payment will influence the forms you need to file. If you paid an established employee, this falls under the scope of a T4 tax slip. On the other hand, if your business employed a contractor and paid in cryptocurrency, you must issue a T5018 tax slip or T4A tax slip.
You have been paid in Cryptocurrency
Unsurprisingly, you must report this on your return. According to current crypto tax regulations, you are obligated to treat your crypto income exactly as you would with regular income. As with fiat currency, your federal tax rate will then vary based upon income bracket.
You have made a donation of Cryptocurrency
As the donor of cryptocurrency, you may be eligible for a tax deduction due to your charitable giving of donations.