Investing in cryptocurrencies is becoming more mainstream, particularly in Canada with its supportive regulatory environment for new and innovative financial products.

The Canada Revenue Agency generally treats cryptocurrencies as commodities, not currency (the same goes for the U.S. Internal Revenue Service). Therefore, “any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances,” the CRA states.

And when crypto is used to “pay” for goods and services, the CRA considers someone to be bartering, and “not reporting income from such transactions is illegal.”

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But the tax treatment of cryptocurrency is “an evolving situation,” said Mehran Sedigh, a CPA and managing partner at Triple M Professional Corp. in Richmond Hill, Ont. In his experience, crypto “was getting treated as a commodity, but now it is being treated as a liquid asset of some sorts,” he said.

Whether earnings from crypto are considered business income or a capital gain depends a lot on the holder’s behaviour, said Sedigh. For a long-term holder, crypto is more likely to be treated as a capital asset (and earnings as a capital gain). But if the holder actively trades crypto, then crypto is more likely to be considered active business inventory, with any earnings considered business income, Sedigh said.

Which events are taxable?

Owning cryptocurrency itself is not taxable. But, according to the CRA, there could be tax consequences for doing any of the following:

• selling or gifting cryptocurrency;
• trading or exchanging cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency;
• converting cryptocurrency to government-issued currency, such as Canadian dollars;
• using cryptocurrency to buy goods or services.

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For example, say your client owes their accountant $50,000 and pays the accountant in Bitcoin. The client bought one coin when it was worth $30,000 and it’s now worth the full $50,000 of that accountant’s bill. “That $20,000 increase in value, from the time you purchased it to the time that you paid the bill with it, would be considered a gain,” Sedigh said.

The big question is whether that $20,000 gain is income or a capital gain.

The CRA would consider the gain to be business income if the activities the client engaged in “involve some regularity or a repetitive process over time.” Those activities could include cryptocurrency mining and trading, as well as creating and selling non-fungible tokens, Sedigh said.

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