Record Keeping of Crypto-Asset Exchanges for Canadian Tax Purposes: Responsibilities of Traders & Investors
Published: November 15, 2023
Introduction: What are Crypto assets?
Crypto assets are digital assets that exist on a cryptographically secured distributed ledger. There are many types of crypto assets, the most common being cryptocurrencies, such as Bitcoin, Ethereum and Tether as well as NFTs. Transactions related to crypto assets often have tax implications and must be reported.
It is important for Canadian Taxpayers to keep proper crypto record keeping of all your activities relating to your crypto assets. Canadian Taxpayers should keep records when they buy, dispose of, or mine crypto assets to make sure that they have accurate information about their activities on crypto asset exchanges.
What is a crypto asset exchange?
A crypto asset exchange is an online platform that allows taxpayers to buy, sell and trade crypto assets for other crypto assets or for traditional currencies. Crypto asset exchanges may also facilitate other crypto asset activities, such as lending and staking arrangements. As exchanges offer their services electronically, it is also possible for Canadian Taxpayers to obtain services from crypto asset exchanges located outside of Canada.
Exchanges may stop operations without notice. When an exchange stops operation, the account holder may be locked out of their account and as a result be unable to access their records.
How should Canadian Taxpayers Report Crypto Taxes?
Any income from transactions involving cryptocurrency is generally treated as business income or as a capital gain, depending on the circumstances. Similarly, if earnings qualify as business income or as a capital gain then any losses are treated as business losses or capital losses.
Taxpayers must establish if a cryptocurrency activity results in income or capital because this affects the way the revenue is treated for income tax purposes. Not all taxpayers who buy and sell cryptocurrency are carrying on business activity. An expert Canadian Crypto Lawyer in Toronto can assist you in determining the appropriate tax treatment of your crypto currency transactions.
When taxpayers use cryptocurrency to pay for goods or services, the CRA treats it as a barter transaction for income tax purposes. A barter transaction occurs when two parties exchange goods or services and carry out that exchange without using legal currency.
To figure out the value of a cryptocurrency transaction where a direct value cannot be determined, taxpayers must use a reasonable method. Keep records to show how you determined the value. Generally, the CRA’s position is that the fair market value is the highest price, expressed in dollars that a willing buyer and a willing seller who are both knowelegdeable, informed and prudent, and who are acting independently of each other, would agree to in a open and unrestricted market. For example, taxpayers could choose an exchange rate token from the same exchange broker you are using or an average of miday values across a number of high-volume exchange brokers. Whichever method taxpayers choose, use it consistenly.
If taxpayers hold more than one type of crytocurrency in a digital wallet, each type of cryptocurency is considered to be a separate digital asset and must be valued separately. For example, a Bitcoin is valued seperately from a Litecoin.
When filing your taxes, taxpayers must report any income or capital gains from crypto asset activities on your income tax return. To meet your obligations for proper recordkeeping, it is strongly recommended that you download and keep any information related to transactions involving your exchange accounts.
This includes, but is not limited to,
- Trades (buy, sell and swap)
- Transfers (deposits and withdrawals)
- Staking rewards
- Yield earnings
- Wallet addresses
- Any other transaction information.
As recommended by our expert Canadian Crypto Tax Lawyers, it is important for taxpayers to download this information at regular intervals while they still have access to their account. Failure to do so will result in you being unable to access this information if an exchange stops its operations. If you are unable to access your exchange information, it will be difficult to determine your income from crypto asset activities, or to support amounts filed should the Canada Revenue Agency (CRA) conduct an audit. In such instances, it is advised to consult an expert Canadian Crypto Tax Lawyer.
Pro Tax Tips Crypto Record Keeping:
Taxpayers should keep detailed records of all crypto asset transactions. These documents must be kept organized. Consult with a top Canadian crypto tax lawyer for assistance with your crypto tax reporting and recordkeeping obligations.
The type of information your records contain depend on your situation and other factors such as:
- Your business types.
- The format you use to keep your records (paper, electronic or a combination of the two)
- If you have converted any paper records or supporting documents into an electronic version.
- If you are involved in e-commerce.
What is Cryptocurrency?
Cryptocurrency is a digital representation of value that is not legal tender. It is a digital asset, sometimes also referred to as a crypto asset or altcoin that works as a medium of exchange for goods and services between the parties who agree to use it. Strong encryption techniques are used to control how units of cryptocurrency are created and to verify transactions. Cryptocurrencies generally operate independently of a central bank, central authority, or government.
What is a disposition?
This refers to the way a taxpayer gets rid of something, such as by giving, selling, or transferring it. In general, possessing or holding a cryptocurrency is not taxable. But there could be tax consequences when you do any of the following:
- Sell or make a gift of cryptocurrency.
- Trade or exchange cryptocurrency, including disposing of one cryptocurrency to get another cryptocurrency.
- Convert cryptocurrency to government issued currency, such as Canadian dollars.
- Use cryptocurrency to buy goods or services.
- Become a nonresident of Canada.
What is e-commerce?
E-commerce is the delivery of information, products, services or payments by telephone, computer, or other automated media. This definition includes the many kinds of businesses activities that are being conducted electronically. However, e-commerce is much more comprehensive than just purchasing goods and services electronically.
E-commerce can also include retail transactions that take place by:
- Automated banking machine
- Credit card
- Debit card
- Television shopping
- Secure private computer networks through electronic data exchange
- The delivery of government services
- Business that is handled over the internet.
This article provides information on general nature only. It is only current at the posting date. It is not updated, and it may no longer be current. It does not provide legal advice nor can it or should be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a Canadian Tax Lawyer.