Cryptocurrency Record Keeping: A Guide from Canadian Tax Lawyers
Published: August 17, 2022
Last updated: September 1, 2022
Cryptocurrencies such as Bitcoin, Ethereum, Cardano, and Binance coin (BNB) have been identified as taxable assets by the Canada Revenue Agency (CRA). Blockchain technology is the foundation of cryptocurrency.
There is a permanent ledger on the blockchain that records and stores all cryptocurrency transactions. This eliminates the need for financial institutions to validate transactions. Because of this, many cryptocurrencies are considered peer-to-peer systems.
The adoption of cryptocurrencies by individuals and businesses has increased the need for clear tax guidelines. While Canadian taxation guidelines have not yet been distilled by legislation and case law, the rules for cryptocurrency taxes in Canada are clear and there are a few key ways in which taxpayers can minimize their tax liabilities.
Why Maintain Cryptocurrency Records?
It is imperative that you keep a record of all aspects of your cryptocurrency transaction history if you want to avoid Canada Revenue Agency (CRA) crypto tax audit complications. In any dealings with the CRA, keeping detailed records is crucial because cryptocurrency coins, tokens, and mining have significant tax consequences.
An important area of disagreement between the CRA and individual taxpayers revolves around whether a particular transaction constitutes a capital gain or business income. If a gain exists, the taxpayer should report it as a capital gain rather than business income due to the capital gains inclusion rate - only half of capital gains are taxable.
Reporting losses as business losses can also reduce your overall taxable income since they can be fully utilized. In contrast, capital losses are only included in taxable capital gains in half of the amount.
A dispute over whether one should report a particular transaction as a capital gain or business income is resolved using evidence. The CRA may disallow your characterization if you do not maintain proper records, so you will have a much harder time proving that your interpretation is accurate.
There is a possibility that the taxpayer may be forced to pay more tax than what is necessary. This would not have happened if the taxpayer had kept detailed records.
Due to the fact that multiple transactions may be required to buy or sell a crypto coin, the number of transactions can appear to artificially increase the volume of trades. For this reason, detailed records indicating the purpose of each trade are essential to providing an accurate picture of the nature and purpose of each transaction.
Keeping records is especially important for cryptocurrencies due to their ambiguous classification and the regulatory environment they operate in. For instance, the US Securities and Exchange Commission, or SEC, filed a lawsuit against Ripple Labs' CEO Brad Garlinghouse and Chair Christian Larsen in 2020. According to the petition, Ripple Labs' cryptocurrency XRP is a security rather than a commodity.
For bitcoin investors, this discrepancy has major regulatory and even tax implications. Keeping thorough records is a crucial component of dealers, miners, and stakers' safety due to the immaturity of cryptocurrencies and the resulting crypto regulatory challenges.
The CRA has published a lengthy list of vital information that anybody dealing cryptocurrencies should preserve. The CRA has stated that it is critical for bitcoin dealers to record:
- transaction ID
- the transaction’s description
- financial and legal fees
- the transaction’s date
- records of exchange and wallets
- Canadian dollar value of the coin at the time of the transaction
- expenses associated with trading crypto currencies
- the address of crypto currencies
- costs associated with using software to manage your tax affairs
- receipts for crypto currency purchases or transfers
It is crucial to remember that this is not an exhaustive list. Additionally, the list of crucial documents to retain is probably lower for private "hobby" traders than it is for professional miners or people who do crypto currency trading as their main source of income.
It's also critical for bitcoin miners to maintain records of:
- receipts for the costs you incurred in the mining operation
- the process of getting rid of bitcoin generated through mining
- receipts for the hardware you bought to mine crypto currencies
- any further documentation on mining operation
- the mining pool agreements and documents
The first item is applicable to anyone who exchanges goods and services using cryptocurrencies. The CRA has classified cryptocurrencies like Ethereum and XRP, as well as Bitcoin, as commodities for use as a means of exchange. Therefore, using Ethereum to buy or sell products and services is seen as a "barter transaction," for example.
In a barter transaction, the value of the products and services is expressed in Canadian dollars and is equal to the cost and sale price of the items or services. As a result, if one "Cherry Coin" is used as a medium of exchange to buy a kilogram of apples, whose regular value is $5.00, the cost and sale price of the kilogram of cherries is $5.00. Sales taxes like the GST, HST, PST, or QST may be imposed in the event of a barter transaction, such as the purchase of an item or service. These also need to be documented, sent, and paid to the government by the service provider.
The Income Tax Act of Canada's Section 230
The Income Tax Act's Section 230 mandates that Canadian taxpayers maintain sufficient books and records. All individuals who are required to pay taxes or collect income taxes, even those who are not Canadian tax residents but operate a business there, are subject to these record-keeping requirements.
To establish the amount of income tax due, Section 230 stipulates that the books and records must be adequate. The person's home or place of business must be where the records and books are kept.
The necessity for a foreign property is another crucial reason to preserve documents of your bitcoin. Form T1135 must be completed by taxpayers who own specified foreign property with a cost base of more than $100,000 Canadian. The CRA said in April 2015 that cryptocurrencies like Bitcoin, Ethereum, Cardano and Matic are "funds or intangible property."
The cryptocurrency is therefore regarded as specified foreign property (and not used or stored in the process of carrying on a business). As a result, everyone who is a Canadian tax resident who has specified foreign property including cryptocurrency with a cost basis of $100,000 or more must report it on Form T1135.
It's crucial to remember that the $100,000 represents an overall sum. Therefore, the possession of cryptocurrencies valued at $5,000 and $95,000 in foreign real estate by the taxpayer is enough to satisfy the obligation for obligatory reporting.
Tax Pro Tip-Cryptocurrency books and records
You must maintain adequate books and records for a minimum of six years in accordance with Section 230. Therefore, if you sold Bitcoin in 2022, you must preserve the books, records, and supporting materials until 2028.
A criminal offense under Section 238 of the Income Tax Act might result from failing to comply. For information on the requirements for maintaining adequate books and records and whether your transactions should be declared as capital gains or business income, get in touch with our knowledgeable Canadian crypto tax lawyers.
1. Do I need to document every bitcoin transaction I make?
Yes, failing to do so might constitute a crime under Section 238. If you don't retain records, the CRA may decide to review your tax liability at its discretion. Without thorough records, the taxpayer lacks the necessary tools to prove that the right amount of tax is due.
2. Do I have to disclose my cryptocurrency holdings if I use a US-based cryptocurrency wallet like Coinbase?
You must use the T1135 Form to report any designated foreign property you own that has cost more than $100,000. If you don't, you risk paying a fine of $25 every day, up to a total of $2500. If the failure to file was made with knowledge or with gross carelessness, there may be further sanctions.
3. How can I determine which records and papers apply to my taxes?
When it comes to cryptocurrencies, record-keeping is essential for tax reporting purposes. If you don't know which records, books, or supporting papers apply for tax reasons, you can owe more money in taxes than if you did. Many individuals have benefited from the help of our Canadian crypto tax attorneys.
Contact Rotfleisch & Samulovitch PC at 416-367-4222 to speak with a Toronto tax lawyer regarding bitcoin record-keeping, or send us an email at firstname.lastname@example.org.
"Only general information is provided in this article. Only as of the publishing date is it current. It hasn't been updated, therefore it could no longer be relevant. It cannot or ought not to be relied upon since it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. An experienced Canadian tax attorney should be consulted if you have special legal concerns.”