Bitcoin and cryptocurrencies seem to be a hot topic nowadays, France is even beginning to sell Bitcoin in its tobacco shops! The hype surrounding cryptocurrency has caused my clients to call to ask me the tax implications of trading them.
The truth is, I know very little about bitcoin. I do, however, know a lot more about the Canadian Tax system. Just remember that the Bitcoin tax in Australia is probably different to the Canadian tax for Bitcoin.
Canadian tax system imposes taxes on taxpayer’s worldwide income.
Whether you are selling drugs illegally or running a multimillion dollar business, you are required to report taxes accordingly.
If you buy bitcoin and sell it during the year and make a profit off it, you are required to report your income in Canadian dollar terms.
My client went on to challenge me, claiming that he could use the bitcoin currency in his virtual wallet to pay other people and hence he never needs to cash out.
He owns the bitcoin anonymously.
How would CRA find out?
First and foremost, you are required to report your worldwide income, whether CRA can find out or not. ? That’s just being a good citizen.
Having said that, if you intend to cheat (and I would not agree to it), unless you never “cash out” from your bitcoin currency. There will always be evidence.
I am not a forensic accountant, but I was an auditor for years.
- When you transfer money to purchase bitcoin, unless you earn cash for a living and never deposit in your bank account, you are taking a large sum out from your bank account to some other trading platform.
- Unless you never cash out and pay everyone in your life using bitcoin, you have to convert your bitcoin to cash somehow. It isn’t like there is a store that you can go into, tell them to convert your bitcoin in your wallet to “cash” anonymously.
- As soon as you withdraw from your virtual wallet to regular Canadian currency in your own bank account, there is a way to find out how much you make! ?
- The last draw is that CRA can do is using the net worth approach. CRA can take a look at what you own, compared to what you have earned and reported over the years, you can analyze whether you have reported the proper amount of income. It may not be perfect but they have used this technique many times.
Okay, now we are settled that there’s a tax impact on trading cryptocurrency. Let’s talk about how much tax you would need to pay.
This really depends.
Similar to buying and selling stocks, if you are demonstrating a trading behaviour (tax term is adventure in the nature of trade), chances are, the profit you make from the trading is considered income. 100% taxable.
If you are like any other cryptocurrency trader making a killing and you own everything in your personal name, 54% on the accrued gain would be payable to CRA. 54% is the highest marginal tax rate in Ontario.
On the flip side, if you are buying bitcoin as a long term investor, bitcoin is a capital property. Capital property means that the gain you make on it is only 50% taxable. (Like when you sell a long-term rental property.)
If you make $1million, $500K is taxable and it is likely subject to 54% tax.
Right now, CRA hasn’t really come out to address the tax impact of bitcoin. I am simply applying the current rule to cryptocurrency/bitcoin to discuss the potential tax impact. ?
One more tip before end of the year for small business owners
It’s almost the end of the year. It’s been an eventful year in the tax world. Thanks to Bill Morneau.
I would like to take this opportunity to remind all small business owners that this is the last year you can use the strategy “dividend sprinkling”.
This means that, if you have issued shares to your lower income spouse, children or other family members, this is the right time to declare dividends to them without being subject to the new “reasonability test”.
We are still uncertain as to how the “reasonability test” will come into effect.
But let’s plan around what we know and declare dividends to maximize the tax savings one last time, before the Liberals take away everything.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant