Income Tax Implications on Sale of Cryptocurrency

One of the trends that emerged in 2017 was the increased interest, curiosity, and popularity of cryptocurrencies such as Bitcoin.  With so many Canadians buying and selling cryptocurrencies, the natural question of “how do we treat cryptocurrencies for tax purposes?” has become an increasingly common question posed to tax professionals.  Unfortunately, like most questions in tax, the answer is complex.  This article will look at one common question, “How do I report gains or losses from the sale of cryptocurrencies for income tax purposes?”

Income or Capital

The starting point for determining the tax treatment on the sale of cryptocurrency is to determine whether the sale was on account of income or capital.  Unlike what may be reported, this is an unresolved question for taxpayers.

There is plenty of case law on determining whether the sale of a property occurred on income or capital; it is likely that when the courts face these questions with respect to the sale of cryptocurrencies, they will use these cases as a starting point for their analysis.  The case law looks to the facts and circumstances surrounding the purchase and sale and weighs certain elements of them to come to a decision.  The factors that are most often reviewed are:

  • The taxpayer’s primary intention when purchasing the property;
  • The relationship between the transaction(s) and the taxpayer’s regular business;
  • The number of transactions undertaken by the taxpayer;
  • The nature of the property and the length of time that it is held;
  • The reason for the sale of the property; and
  • The taxpayer’s secondary intention when purchasing the property.

Certain factors tend to support an income treatment (such as a high volume of transactions or a short period in which the asset is held), while other factors support a capital treatment (such as purchasing the asset primarily for its inherent use or a long period in which the asset is held).

In the event that the sale is held to be on capital account, a capital gain or capital loss will result.  However, in the event that the sale is held to be on account of income, net business income or a net business loss will result.

Calculation of Gain or Loss

Once a determination of whether the sale of cryptocurrency was on account of income or capital, the next step would be to determine the amount of gain or loss that arises on the sale. It should be noted that the calculation of a gain or loss on income account will differ than a calculation of a gain or loss on capital account.  This is due to the fact that the rules for computing capital gains or losses are different and often, more restrictive, than the rules for computing profit or non-capital losses.  This difference in the rules is a common source of confusion for taxpayers and tax preparers.

Capital Gains and Profits

Once the amount of profit (non-capital loss) or capital gain (capital) from the sale of cryptocurrency is calculated, the sale will then be included as part of a taxpayer’s taxable income.  Profit and non-capital losses are fully included in a taxpayer’s taxable income, while only one-half of a taxpayer’s capital gains are included in a taxpayer’s taxable income.  Conversely, capital losses can only offset other capital gains.  In the event that the taxpayer does not have any capital gains in the year of the sale, the taxpayer can carry-forward their capital losses indefinitely or carry them back to the past three taxation years.

There may be benefits from either an income or capital treatment, depending on the taxpayer’s situation.  As such, we advise that they seek counsel from a tax lawyer or tax specialist promptly.

*David M Piccolo is a tax lawyer and partner at TaxChambers LLP.