Digital currencies, also known as cryptocurrencies, are becoming increasingly popular assets. Businesses of all sizes are accepting these currencies as payment for goods and services. Individuals and businesses are also investing in digital currencies, hoping to profit down the road. If you plan to accept or invest in digital currencies, it’s important to note that the Canada Revenue Agency taxes them in two different ways.
One way that digital currencies are taxed is when they’re invested in and traded. If you buy and hold digital currencies and later sell them for a profit, you must report the capital gains. The CRA taxes these capital gains just like any other long- or short-term investment, such as stocks or mutual funds. For example, if you purchase $5,000 of a digital currency and sell it later for $7,000, the CRA taxes the $2,000 profit as a capital gain.
When it comes to payments, businesses may want to accept digital currencies to attract more customers and increase the bottom line. When you accept digital currencies as payment for goods and services, you must report this to the CRA, just like any other revenue. The CRA taxes the amount of the sale the same, whether it’s in digital currency or Canadian dollars. Convert the digital currency to Canadian dollars using the exchange rate on the day of the transaction and report that amount. As of 2017, you must report any profit over $200 from currency exchange as capital gains, so if you hold the digital currency and decide to convert it at a later date, you may need to pay capital gains on a portion of the transaction, too.
For example, you accept 10 hypothetical digital currency units for a transaction. On that day, the value of these currency units is $2,000. You should report this amount, and the CRA will tax it at regular rates. Next, assume you convert the currency at a later date, and its value is $3,000. Out of this $1,000 gain, the CRA taxes $800 as capital gains. Whether you’re investing in digital currencies or accepting them as payment for goods and services, you do have to pay taxes. How much tax you pay depends on the nature of the transaction.