The rise of cryptocurrencies was duly acknowledged by CRA in 2014. We all know how cryptocurrency has changed the meaning of digital assets permanently. There are many businesses that have already made millions or even billions of dollars by making investments in cryptocurrencies.
The important discussion here is about the taxation of cryptocurrencies. Whether Bitcoin, Altcoin, Etherium, or any other form of cryptocurrency, all fall under the same rulings by the Canadian Revenue Agency. Generally, the CRA considers cryptocurrency as a commodity for the purposes of the Income Tax Act. There was a misunderstanding about cryptocurrency in its inception that once could directly transfer all the cryptocurrency payments into a Tax-Free Savings Accounts (TFSA), but that is not true.
Now let’s find out what are HST/GST regulations apply to Cryptocurrencies, as described by CRA.
Cryptocurrency: Capital Gain or Business Income?
According to CRA, when a person makes any transactions involving cryptocurrency, the income generated will either be treated as capital gain or business income. This is valid for the losses as well. For example, someone engages in cryptocurrency trading. The profits will be considered as capital gain or business income. At the same time, the losses will be considered as business losses or capital losses. In most cases, it solely depends on the taxpayer to establish that either their cryptocurrency revenue will be income or capital for the business.
Cryptocurrency: Barter Transactions
First of all, the dealing in cryptocurrency between the two parties is only valid if both the parties agree to avoid actual currency like Dollars and use their digital assets for the exchange. This transaction can become quite complex if not regulated through a professional accounting/bookkeeping firm. So, when the two parties finally establish and calculate a realizable value for exchanging any goods or services, this transaction is treated as a barter transaction by the CRA.
Bookkeeping for Cryptocurrency
No matter what method someone uses for earning through cryptocurrency, the most important thing is to keep all the records safe and sound. Businesses that accept cryptocurrency as payments for their goods or services have to establish their financial structure well in detail. The best way to do this is to hire an experienced and professional bookkeeper. That way, the business that makes transactions in the form of any digital assets can maximize their tax deductions. In addition, their investments remain on the safe side.
HST/GST on Cryptocurrency
Suppose you use cryptocurrency for the exchange of any taxable property. In that case, the GST/HST will be applied to the service or property. The calculation for these GST/HST returns will be based on the fair market value that the cryptocurrency possesses at the time of the exchange. So even if a business accepts cryptocurrency as a taxable service or property payment, the rules will be the same. And if you are worried about how to file your HST returns while using cryptocurrency, it is much better to take the assistance of a professional accounting firm.
It is better to read full guidelines by the CRA on cryptocurrency taxation before making any HST/GST filing procedure decisions. Furthermore, it will be essential for any business to keep their books updated and record any technical calculations made during their cryptocurrency exchange deal. So far, the use of cryptocurrency is taxed by the Canadian government, just like other digital assets. But the possibilities to reduce this income tax or HST on cryptocurrencies are many, and a good tax consultant may help you reap those benefits.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.