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How Cryptocurrency Stablecoins are Taxed: A Canadian Tax Lawyer’s Guide

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By: Crypto Tax Lawyer

Published: January 13, 2023

Over the past several years, the cryptocurrency market has been very volatile. As a matter of fact, it is among the most erratic non-derivative financial assets available. For instance, one tweet from Elon Musk might cause the price of a Bitcoin to swing by more than 10% in a single day. However, because of their stability, stablecoins have become very popular. Stablecoin refers to a specific class of cryptocurrency that is "pegged" to a more reliable reserve asset, like fiat currencies or precious metals. Stablecoins have proven crucial to how the world's cryptocurrency markets operate because they enable markets to maintain a healthy level of liquidity without holding any cash. The most widely used stablecoin, Tether (USDT), now handles 70% of all Bitcoin trades. With 95% of the total supply of Tether issued since the beginning of 2020, there are currently 78 billion units in circulation. Tokens issued by Tether Limited, which is in turn controlled by the owners of Bitfinex, are used to host the Tether cryptocurrency on the Ethereum blockchain.

The 2021 settlement between Tether and New York Attorney General Letitia James states that "Tether represents to users that any holder of tethers can redeem them from Tether the company at the rate of one tether for one U.S. dollar," but as of 2017, Tether Limited stated that owners of tethers have no contractual right, other legal claims, or guarantee that tethers will or can be redeemed or exchanged for dollars. The lawyer for Tether Limited asserted on April 30, 2019, that each tether was backed by $0.74 in cash and cash equivalents. Only 2.9% of Tether was guaranteed by cash, according to a report provided by Tether in May 2021. The remaining over 65% was secured by commercial paper, including loans to affiliated companies like Bitfinex.  However, amidst the general crypto volatility, some stablecoins have in fact lost value.

Stablecoins: How They Work

Stablecoins are intended for daily usage to promote the widespread adoption of digital currencies, in contrast to Bitcoin and Ethereum, which are frequently retained as long-term investments or as speculative investments. Stablecoins' expected constant value makes it unlikely that their value will rise over time. Stablecoins come in a variety of forms that are all linked to the underlying asset. Stablecoins with fiat backing is arguably the most widely used because their value is based on fiat currency. Examples include USD Coin (USDC) or Tether (USDT). Before receiving asset-backed stablecoins, users are typically required to place up a physical asset as collateral, such as gold, silver, or another cryptocurrency. Many investors find these stablecoins unattractive since they tend to be centralized. One kind of stablecoins, commonly referred to as non-collateral stablecoins, is likewise not backed by any asset at all. Price swings will be managed by a computer algorithm that either increases or decreases the supply of coins. These stablecoins are frequently given out by startup blockchain networks as incentives to promote a coin that has just been created.

The Taxation of Stablecoins

Stablecoins are generally regarded as an asset around the world, despite the fact that the Canada Revenue Agency (CRA) hasn't issued any administrative guidelines on the matter. In light of this, depending on the nature of the transactions involved, the disposition of stablecoins may be subject to income tax or capital gains tax.

Stablecoin Issuance and Redemption

In general, when a user purchases stablecoins using fiat currency, this trade shouldn't be considered a taxable transaction since it is essentially a transfer of fiat currency into digital currency. By the same token, issuing stablecoins backed by precious metals shouldn't also be subject to crypto taxes in Canada. However, the price of the stablecoins will depend on the acquisition amount.

Stablecoins are simply changed back into fiat currency or tangible assets that serve as their backups when they are redeemed. Because of its stability, one stablecoin often equals a predetermined quantity of fiat currency or precious metals, so there shouldn't be any gain or loss from such redemption. As a result, there typically isn't any tax that results from any redemption. However, if the quantity of fiat currency obtained from the sale of stablecoins differs from the cost, there will either be a gain or a loss. If a gain occurs, the CRA may classify it as either business income or capital gain.

Cryptocurrency Exchange with Stablecoins

When you exchange cryptocurrency, such as Bitcoin or Ethereum, for stablecoins the transaction is usually considered a taxable event. Again, whether the gain is considered business income or capital gain is determined by the facts of each individual case. Because stablecoins are so stable, you may end up paying no tax because there is no gain or loss as a result of the conversion. To demonstrate, consider the following example:

Assume you have 1 ETH that you purchased for $US3,000. Because the market has been so unpredictable, you decide to exchange your 1 ETH for USDC (a stablecoin). Because the fair market value of 1 ETH on the day of conversion is $3,300, you will realize a capital gain or income inclusion of $300 (3,300 – 3,000), and this conversion is a taxable event.

Receipt of Stablecoins as Payment

Stablecoin payments should be reported as income when they are made in exchange for products or services, and coin-to-coin exchanges are typically taxable events. But merely moving stablecoins between your wallets is not regarded as a taxable event. Users of some cryptocurrency platforms can also earn interest on stablecoins, and you must also report this interest as income.

Tax Pro Tips - Maintain a record of your transactions

The proceeds from the sale of stablecoins may be deemed business income or capital gain, and you must report it correctly. The CRA has stated that taxpayers must keep records of all transactions for a period of six years from the end of the previous tax year. As a result, it is recommended that a taxpayer adopt the practice of exporting transaction history from trading platforms on a regular basis. Tax evasion, which is a crime, may be committed if any profit from the sale of stablecoins is not reported. Fortunately, the CRA's voluntary disclosure program (VDP) is intended to give a taxpayer a second chance to amend any errors they may have made or to divulge information they may not have previously disclosed. However, the CRA is not compelled to accept all VDP applications, therefore consulting with a knowledgeable Canadian crypto tax lawyer is strongly advised if you want to increase the likelihood that your change of voluntary disclosure will be accepted.

Frequently asked questions

I have converted bitcoin into Tether. Does this give rise to Canadian tax implications?

Any coin-to-coin exchange is a disposition for Canadian tax purposes and if there is a difference in value between the time the coin was acquired and disposed of then the gain or loss has to be reported for Canadian tax purposes. The receipt of a stablecoin such as a Tether does not change the tax treatment.

I sold some USDC for Canadian dollars (fiat currency). Do I have to report this transaction to the Canada Revenue Agency?

Stablecoins such as USDC usually do not fluctuate in value.  So normally the proceeds you received for selling your USDC should be the same as your cost. However, if there has been a change in value it is a taxable transaction that has to be reported.


"This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the articles. If you have specific legal questions, you should seek the advice of a lawyer."

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