Cryptocurrencies have become an indispensable part of our society. Many people and companies around the world have decided to invest in this new asset. How exactly do cryptocurrencies work, and what is the impact associated with Bitcoins? Here's what you need to know about cryptocurrencies and the tax implications.
Cryptocurrency is an entirely digital currency and payment system. Unlike traditional currencies such as the Canadian dollar or the euro, cryptocurrencies are not governed by government authorities. It is precisely this characteristic that has contributed to the growing popularity of this new asset. What's more, this payment system enables highly secure exchanges and transfers thanks to advanced encryption. Like fiat currencies, the value of Bitcoin fluctuates. This cryptocurrency has experienced major crises, such as the one in 2022. Despite this, cryptocurrencies continue to grow in popularity worldwide.
Since the nature of cryptocurrencies differs considerably from that of fiat currencies, they are also acquired in different ways. Bitcoins and other cryptocurrencies can be acquired in three ways:
Mining is the central operation of the cryptocurrency network. It involves discovering new "coins", which are then recorded in a large distributed ledger. Each cryptocurrency has a defined number of coins that can be discovered in this way. To achieve this, miners configure their hardware and computers to solve highly complex cryptographic puzzles. The first miner to solve the puzzle is rewarded with cryptocurrencies.
Cryptocurrencies can also be obtained through trading. In fact, it's possible to exchange them for a traditional currency.
Finally, a person or company can acquire cryptocurrencies by exchanging them for goods or services. For example, a cryptocurrency can be accepted as payment for goods or services. This is where taxation comes into play.
In Canada, the tax treatment of cryptocurrencies can vary. As a general rule, the Canada Revenue Agency does not consider the possession of cryptocurrencies to be taxable. However, if you carry out transactions that qualify as "dispositions", certain tax rules may apply and affect your business taxes.
A disposition refers to how you part with something, whether by sale, transfer or gift. In the case of cryptocurrencies, certain tax consequences could apply if a company or taxpayer performs any of these transactions:
If you dispose of cryptocurrencies in any way, you must then determine whether the profit made is considered income or capital gain. This step is essential, as income and capital gains are subject to different tax treatments. Each situation must be assessed on its own merits. In general, a business activity is considered to be a repetitive operation. However, in certain situations, a single transaction may be considered a commercial activity, particularly in the case of projects involving risk or business of a commercial nature. It's also important to take into account the start date of your activities. Funds and assets received in preparation for the start-up of your business are generally not considered income.
So, if your use of cryptocurrencies is related to a business activity, you must include the corresponding profits in your business tax return. Of course, you must convert the amount of these transactions into Canadian dollars. To do this, you must use the exchange rate in effect on the day of the transaction(s) in question. If you've paid your employees in cryptocurrency, this also applies to them. They will need to convert the payment amount into CAD on the day they received it to determine their income. As far as capital gains are concerned, they are generally included in income for the year. However, only half of the capital gain is taxable.
There's only one solution: deal with accountants who can help you make the right analysis of your situation and who are experts in cryptocurrencies. So don't hesitate to contact us if you'd like to find an accountant tailored to your entrepreneurial reality to help you through this process. https://www.bankeo.ca/
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