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Your Bitcoin Accountant: Tax Planning for digital asset investors


MP Group as a Toronto based bitcoin accountant firm with many investors in digital assets / cryptocurrency identified the following three common questions:

1)      How is my cryptocurrency investing going to be treated for tax purposes?

2)      How do I file my personal tax return or corporate tax return?

3)      What strategies are available to minimize my tax exposure on my digital asset investments?

MP Group Chartered Accountants have established themselves as the go to cryptocurrency / digital asset tax and advisory firm since 2014. Working with the founders of the top blockchain firms in Toronto, MP Group has developed proprietary knowledge and strategies that have helped clients in the blockchain industry and investors in cryptocurrencies. The firm is also co-authors of “A Practical Guide to Smart Contracts and Blockchain Law” a textbook that has been published by LexisNexis and being used in York University in Toronto.

Based on our firm’s experience, here are our answers to the above 3 questions:

How is my cryptocurrency investing going to be treated for tax purposes?

The answer to this question is – it depends. For investors in cryptocurrency such as bitcoin, ether, or ripple, the tax treatment on profits is based on the intent of the investor. If the investor is actively trading cryptocurrency versus someone who buys cryptocurrency and holds for over a year, the tax treatment on the profits would be different.  Tax liability is incurred when cryptocurrency is sold and realized as fiat currency or exchanged for another cryptocurrency either as a capital gain or business income. If the trading activity and volume of trades are frequent, CRA will view the gains as business income rather than capital gains. In this case, when bitcoin or any other altcoin is sold for fiat currency or another altcoin, the profit over the cost base in which it was purchased will be reported as a business income for tax purposes. If assets are purchased for long term hold, the gains would be reported as capital gains.

CRA has provided some guidance over crypto to crypto exchanges as bartered transactions. CRA mentions that digital assets can be bought and sold like commodities such as gold/silver. There is some CRA guidance on determination between business income and capital gains with respect to guidance around securities trading.

How do I file my personal tax return or corporate tax return?

Based on the above analysis of your cryptocurrency investment activities and intent, the investors’ personal tax return would reflect the gains earned during the year as either capital gains or business income. Based on the goals of the investors that are actively trading cryptocurrency, there are better ways to carry out the trading activities. For example, a corporation may be a better solution to carry out active trading of digital assets as it allows for a lower tax rate on the first $500,000 of active business income. Therefore, it should be assessed whether a corporate or personal strategy makes sense for your long term strategy as an investor in digital assets or cryptocurrencies.

What strategies are available to minimize my tax exposure on my digital asset investments?

 As noted above, for active traders of digital assets and cryptocurrency, a corporation may be a viable strategy to carry out this business activity. For positions held personally, we can transfer the assets to a corporation without triggering a capital gain though a special election and tax mechanism known as a section 85 rollover.

In addition, another strategy we help with is lowering the capital gains tax on accrued capital gains on bitcoin or other cryptocurrency holdings from ~26% to ~13%. This is also done through a corporation. 

Through the use of corporation and holding companies, our clients can diversify into other asset classes tax efficiently, without triggering any personal tax and using more after tax dollars to work for them.


Contact MP Group for more information and assistance as your bitcoin tax accountants: (416) 214-0527 or one of our partners via email:

Kunal Parshotam - kparshotam@mpgroupcpa.com

Raffael Mazze - rmazze@mpgroupcpa.com

 

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