Taxology – Episode 13: Crypto and taxes – All the facets to crypto-assets

CC: Welcome to Taxology, the official podcast of the Canada Revenue Agency (CRA). I'm your host, CC, and today we're diving into the ever-evolving blockchain-powered world of crypto-assets! I know, Your social media feeds are probably jam-packed with ads, memes, and news about Bitcoin, Ethereum, and Tether.

Let's face it, the crypto space can feel like the Wild West of finance. Exciting, unpredictable, and sometimes a little bit confusing. But here's the thing, whether you're HODLing Bitcoin or mining crypto in your basement, your crypto activities do have an impact on your taxes. And we're here to make sure you don't get lost on the blockchain when tax time rolls around.

In today's episode, we're sitting down with one of the CRA's crypto-savvy subject matter experts to break it all down for you. We'll talk about which activities could have tax implications here in Canada, how to report them properly, and share tips to help you stay organized. Because let's be real, nobody wants to be scrambling through their transaction history on April 30^th!

So let's help you navigate the tax side of crypto with confidence. Spoiler alert, it's not as complicated as you might think. So let's get right to it. Let's welcome our guest, Nathan.

Welcome to the show, Nathan. Thank you so much for coming today.

Nathan: Thank you. It's great to be here.

CC: So tell us a little bit about you and why are you a crypto expert?

Nathan: I joined the CRA in June of 2022 on the crypto team, which at CRA HQ, we're the primary point of contact for crypto-related issues.

So my day-to-day role for stuff would be developing internal materials to help auditors with crypto-related audits and also to review closed files to see how crypto is related in these compliance cases.

I've also helped create some statistical reports about our audit information. So basically, I've had three years at the CRA headquarters and have gotten great knowledge in terms of some of the resources that were internally created by our team before that, and also just doing general research myself on the crypto environment.

CC: Can you go over the different types of crypto assets and what crypto related activities may have a tax implication?

Nathan: So the Canada Revenue Agency, we offer a helpful resource at canada.ca/CRA-crypto-assets, which goes over a lot of the type of crypto assets and some of the tax implications associated with them.

Some of the most popular ones would be a payment token, which I think is what people associate the most with crypto, which is stuff like Bitcoin and Ethereum. These coins that are used as a medium of exchange. So these would generally follow the rules of like a barter transaction as opposed to a typical currency.

CC: So like paying for a cookie. If you made a cookie, I'd buy the cookie from you, using cryptocurrency?

Nathan: So using a payment token.

CC: Payment token.

Nathan: Yes, with a crypto asset that is a payment token, I can buy goods and services such as a cookie. That is a barter transaction where I am exchanging the crypto asset for a cookie.

As long as a merchant accepts the payment token, I can purchase any type of goods and services with crypto assets. We've seen situations where people have purchased high value assets using crypto, including cars and houses. So there's really no true range. It could be as small as a cookie or it can get as large as a house.

There are many types of crypto assets. There are payment tokens, which I just got over, non-fungible tokens or NFTs, utility tokens, security tokens, and stablecoins.

Some will represent rights on platforms, such as a video game. Some are presented as ownership of digital pieces of art. And some have its value pegged to underlying assets, like a commodity or traditional fiat currency.

So I won't get into the details on all type of crypto assets, but I want to make people aware that each different type of crypto asset should be looked into and treated individually and not have it all be lumped together.

CC: You just said fiat currency. What is that?

Nathan: So fiat currency is a term we use for like legal tender. So basically like the Canadian dollar…

CC: Oh okay.

Nathan: …like the US dollar, that would be fiat currency. So if I exchange a crypto for fiat currency in like Canada, it's basically like I'd exchange my crypto asset for the Canadian dollar.

CC: So what are the tax implications that are connected to crypto then?

Nathan: So for the tax treatment for crypto assets, it's not based off the type of assets I explained previously, but it's more of the nature of what you're using it for.

So in the early days of our crypto audits, we mainly saw stuff for trading in like mining activities, where it's basically like you're one where you're exchanging crypto for another crypto, or you're exchanging it for fiat currency, or for crypto mining where you're trying to create more crypto through solving these like complex algorithm puzzles.

CC: Like crypto for crossword?

Nathan: It's for mining. So basically is you have to try and create these like blocks on the blockchain. Where basically in order to create the block, you have to solve like a complex mathematical algorithm.

So what you do is that you kind of try to solve this puzzle and then, if you get it correctly, it creates a new coin on the blockchain. So it creates like a new Bitcoin, and then you get a bit of a reward from it.

CC: Nice.

Nathan: So, those were most of the common ones we'd see, but as the space evolved, we've seen that crypto is being able to be used in a variety of ways.

I think the main thing we want to emphasize here is for reporting your crypto assets, you have to report it when a disposition of crypto assets occur, which in this case, it could be stuff such as like trading or exchanging the assets for either currency or another type of crypto asset.

So if I'm exchanging like Bitcoin for Ethereum, that would count as a disposition of the Bitcoin and would have to be a reportable event. Also, if I'm like converting it to fiat currency, then there also is the tax implications on that too.

Also for stuff, if I use it, crypto to buy like goods and services. So if I'm like exchanging Bitcoin like for a car, that would count as a disposition of that Bitcoin and that would have to be a reportable event.

If I'm also transferring ownership of the asset, so let's say I'm gifting you like a Bitcoin, that would also be like a reportable event. So in terms of the actual like tax implication on the activities, like most of these crypto activities have to be reported to the CRA.

So our best recommendation is that if you have an accountant or a tax professional, it's important to provide them, offer your crypto activity so they can file your return properly. That, in addition to the landing page that I had mentioned earlier with a lot of information, can help you get on the right track in terms of how to properly file it.

However, there's so many different complications in terms of crypto that it's very important to be contacting your tax professionals or accountants if you arise a situation that seems unique and you're having difficulty determining like how you're actually supposed to report it.

So most of the stuff when you dispose of a crypto asset, it takes place in either business income or capital gains, and in which case the tax obligations would differ, where for business income you would include all of it, and then for capital gains you'd only include half of the gain onto it.

But in terms of determination of business income or capital gains, there's a lot of criteria that were established by the court on how to determine if it's business income or capital.

So it's very important to kind of be mindful of the potential tax consequences when you're transacting in crypto and also to check our webpage and consult with your tax professional about this.

CC: So let's say I do have crypto assets and I have to report my activities to the CRA. How do I properly report my crypto asset income?

Nathan: Yeah, so as mentioned earlier, to help with your tax responsibilities, there's the landing page that has resources on what you should be doing for reporting and also has guidance for how to report them.

The problem is with people doing their own external research is that Canada, they treat crypto assets differently than other countries. So whatever the tax implication of something in one country might be different in another country. So it's important to kind of read up on your knowledge for reporting income activity specifically in Canada, as there's not really a general way.

I think a lot of people might go to like YouTube or like Google to quickly search up how to do it, and then you might get someone who's in the US where it could be potentially different.

CC: Right.

Nathan: So it's important that to solely focus on Canadian tax implications instead of just simply researching for general tax implications because as mentioned earlier, it's completely different all throughout the world. So you never know like if you're getting the right information.

And the best thing for reporting is to keep books and records either for manual entries or like online ledgers of your crypto asset activities. But there also are softwares available that can help you track your crypto transactions.

The CRA doesn't really have like a preference on if we prefer manual tracking or using like software. So it's really just choosing whichever one is preferred by you. It's important though that even if you are using crypto tax software or you're doing manual entries, we still would like for you to keep your books and records that includes the original source documents that were used in the software.

So basically, if I'm importing my crypto asset activities to this tax software, and it's basically like filing it for me, or like giving me like the tax implications of it. We still require that you keep the original source documents that you put into it.

Because for most of these tax softwares, they're stuff like manual entries that may cause potential human error and may cause problems in the return.

CC: So just keeping your receipts.

Nathan: Yeah, because those are only data aggregators in a way. So if I'm looking at the tax software, like the tax software report or what it's reporting, there's no guarantee that it's 100% accurate. So in the event of an audit, it's very important that you have it ready, like your original books and records, just so you're able to fully justify your transactions in the event of an audit.

It's important that if you use the crypto asset exchanges or custodial platforms, that you should become familiar with the platform and the information you're able to access as each exchange has like different types of data included in their reports.

So it's important that you know what data you're going to get and potentially use platforms where you're getting like the information you need. You're responsible for keeping your books and records for the past six years, where they could potentially apply in an audit.

So basically, keeping it for six years is extremely important, as if you don't have these sources available, it will become very difficult in order to justify your case.

And it's also important that if you're getting records from a crypto asset exchange to regularly export your data, as there could be potential complications in terms of the exchange stops servicing in Canada, they're seizing operations, or something like losing access to your account. In the event of an audit, we require source data in most cases.

CC: I think that's how it is for regular tax filing too, right? Keep your records for six years, keep your receipts.

Nathan: Yes, exactly. And I think a lot of the things we would see is that people are using the tax software as these are the records and they don't see the point of keeping the original ones, even though like we need the original source documents…

CC: Right.

Nathan: …Because as I mentioned earlier, it's just data aggregators.

So there's potential for seeing like manual entries or potential errors in how it gets imported or something that could mess up the report. So if you get audited and that's all you have, you're not going to be able to justify the transactions.

CC: What if I have been scared and I have not been reporting my crypto asset income?

Nathan: Not reporting your income has potential to have impact on your previous returns. If that does happen, you should either contact us directly at the CRA or reach out to your tax professional to see what the next step could be.

If you do discover that you're filed incorrectly in previous years due to just a lack of knowledge or an error, taxpayers do have the opportunity to use our Voluntary Disclosures Program as a way to contact the CRA and correct your returns.

CC: And I won't get in trouble?

Nathan: It would definitely be on a case-by-case basis, but definitely they will be trying to help you in a way to correct your returns.

CC: Okay.

Has anything changed in the crypto world recently that might impact how people are taxed compared to past years?

Nathan: So soon, Canadian crypto asset platforms will have to report to the CRA information, such as the identity and amount in transactions about their users under what is called the CARF, or Crypto Asset Reporting Framework.

CC: Okay.

Nathan: Also, as part of international agreements, Canada will share the same information with foreign tax administrations and receive similar information from them.

So globally, there are 67 countries that have or will implement the CARF, and basically will exchange information with another.

So if we see a Canadian taxpayer in a country with CARF, they are transacting in something in another country, we would be able to kind of collaborate and get that information. The reporting requirements for the service provider will begin on January 1st, 2028.

So though it's not fully implemented, it is definitely something that will have an impact on potential taxation and how reporting of crypto assets will go in the future.

CC: Cool.

Do you see any common misconceptions about crypto assets in Canada?

Nathan: I think the main thing that I notice is that people believe that crypto assets are just completely decentralized, even though in Canada there are a large number of registered exchanges and even financial institutions that allow you to transact through crypto.

So these entities basically are acting like the banks or the brokers for crypto. So basically they're the ones that manage the trades, hold your crypto, they charge you platform fees.

And then I think a misconception on that on top of it is that crypto transactions are completely anonymous. Which this is far from the truth, as on these registered exchanges, you need to provide on most of them stuff like “know your customer” requirements where you have to provide your personal information on them.

And the CRA has tools and frameworks to get the user information when needed. So people transacting on these exchanges are potentially at risk of having this information pulled if needed in case of an audit.

CC: Got it.

Where can I go to keep up to date on all things crypto and to learn more about crypto in Canada?

Nathan: So to learn more about crypto on our end, Canada.ca and the CRA have web pages that go further into the tax implications of crypto. So as mentioned, the landing page, which has a lot of information, help you get the general basic idea on how to report your crypto. And also the CRA offers stuff like tax tips, where we go through just some other implications of crypto assets.

I think the important thing is that these aren't the only resources in terms of like, I don't want a taxpayer listening to this and they're like, oh, if I just look at this, then this is all I need to do for reporting my crypto. You still need to do your due diligence in terms of using your tax professionals in your account to try and determine the potential impact.

But I think this gives general basics for if I'm transacting crypto, as like a casual person, I'm doing stuff on the exchanges, this would be how I should be reporting my income. And then I would follow it up with my either tax professional and see if they agree with it.

CC: Well, thanks again for taking the time for coming today to tell us all about crypto assets and what the implications are for taxes.

What are the key takeaways that you want people to have when they're listening to today's podcast?

Nathan: The main points I think are important to take away from this is, one, what counts as a disposition and a reportable activity for crypto. Because I think there may be a bit of a misconception of people thinking that, “Oh, if I'm exchanging one crypto asset for another, I don't need to pay taxes on it because I'm not converting it to fiat”.

But anytime a disposition occurs, as mentioned earlier, that's a reportable event.

Another thing is to ensure that people are maintaining books and records to regularly export and just know that the crypto tax software that you use isn't like the all and only when you're, an audit is conducted, we require these source documents.

And then I think the last thing is just the resources we have available, like the CRA landing page, the tax tips, but also for additional questions you may have about it, your tax obligations, please contact your tax professionals in terms of trying to fully get the understanding of what you're actually reporting, to ensure that there's less errors and less chances of an audit occurring.

CC: Great. Well, thanks again for coming.

Nathan: Thank you so much. I'm happy to do it, and I'm happy that I was able to share sort of more of the crypto aspect of the Agency, because I think that's something that a lot of people might not have the most knowledge on. So it's important that we get to share it here.

CC: A big thank you to our guest, Nathan, for joining us today and helping us decode the tax side of crypto assets. As this exciting digital space continues to evolve, we encourage you to visit canada.ca/cra-crypto-assets for the latest updates, guides, and resources. Trust us, it's packed with useful info.

And hey, don't forget to follow us on Facebook, X, and Instagram @CanRevAgency for even more tips and updates. If you're new here, make sure to check out our previous episodes for all things taxes, because taxes are everyone's favorite topic, right?

Thanks for tuning in to Taxology. Until next time, I'm your host, CC. Remember, when it comes to taxes, don't be like that one person who lost their private keys. Stay safe and do your taxes.