Written on behalf of Feigenbaum Consulting
The advent of Bitcoin and other digital currencies provides opportunities for people to use currencies outside of those controlled by traditional financial institutions. The explosion in the value of Bitcoin, the most well-known digital currency (also known as cryptocurrency) brought talks that the Canada Revenue Agency would be finding ways to tax it. With tax season approaching, it is worth taking a look at how the CRA currently determines the taxation of cryptocurrency when it is earned, or mined.
What is Cryptocurrency Mining?
One of the most significant differences between Bitcoin or other cryptocurrencies and traditional forms of currency is how it is “made.” Bitcoin allows people to earn, or create, Bitcoins without actually purchasing it. That’s not to say mining is not expensive or difficult, though. Bitcoin miners use powerful computers to complete complex tasks that allow Bitcoins to be moved securely. They are rewarded for these tasks with Bitcoin which they can then sell or trade.
A 2019 article from Investopedia explains Bitcoin mining as follows,
“Bitcoin mining is performed by high-powered computers that solve complex computational math problems (that is, so complex that they cannot be solved by hand, and indeed complicated enough to tax even incredibly powerful computers). The luck and work required by a computer to solve one of these problems is the equivalent of a miner striking gold in the ground — while digging in a sandbox. At the time of writing, the chance of a computer solving one of these problems is about 1 in 13 trillion.”
Is Tax Payable on Mined Bitcoins?
In a previous blog, we explained that the profit from the sale of Bitcoins must be claimed as capital gains. But what about when a Bitcoin is initially earned? In 2019 the CRA issued a document proving an overview of the tax implications regarding cryptocurrency and specifically discussing the tax implications of mining for Bitcoin.
The CRA stated that Bitcoin mining should be treated as a barter transaction, which it defines as being “effected when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money.” In discussing the tax consequences related to mining for (rather than purchasing) cryptocurrency, the CRA stated,
The income tax treatment for cryptocurrency miners is different depending on whether their mining activities are a personal activity (a hobby) or a business activity. This is decided case by case. A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and will be taxed as such.
Inventory vs. Capital Property and Business Income vs. Capital Gain
Further complicating matters, the CRA document also makes a distinction between those who obtain profit from disposing of cryptocurrency as a part of a business, or not. If it is deemed to be a business, the profit realized will be taxed as business income. Signs that a person is operating as a business with respect to earning profit from cryptocurrency include:
- they carry on the activity for commercial reasons, in a commercially viable way;
- they undertake activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory;
- they promote a product or service; and/or
- they show that you intend to make a profit, even if you are unlikely to do so in the short term.
If the currency is mined as part of a business, one must also determine whether the assets are held as inventory or capital property. The distinction between the two can be complex. Clearly, the tax implications of cryptocurrency, whether mining or buying, are intricate and best addressed with an experienced tax professional. Each situation is different and dependent on the surrounding circumstances. In order to ensure that you are compliant in your personal and business tax reporting, seek guidance from a trusted professional.
If you have questions about how investing in Bitcoin or other cryptocurrencies will affect your current personal tax plan contact Feigenbaum Law. We are leaders in the field of tax law, and offer services to clients in the US, Canada and around the world. Contact us online to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.