MP Group Chartered Accountants – Blockchain and Cryptocurrency accounting and tax specialists
As a Chartered Accountant firm specialized in Blockchain, we have been asked many questions around accounting for cryptocurrency and the tax implications when gains are realized. As such, we have compiled some frequently asked questions over the course of the years.
About MP Group
MP Group has been working in the Blockchain and Cryptocurrency space since 2014. Our partners have been working with cofounders of coins such as Ethereum, large mining operations, cryptocurrency investors, BTM machine operators, wallet developers, etc. MP Group was one of the first CA firm’s to accept bitcoin as payment.
Frequently Asked Questions
Is Cryptocurrency to Cryptocurrency Transactions Taxable?
These transactions have been overlooked by many investors. Generally when you are buying and selling between cryptocurrencies, this is considered a barter transaction. As such, if there are accrued gains in a particular coin (e.g. polymath) and subsequently sold for another coin (e.g. bitcoin), it is a realization of the gain even though you haven’t sold for fiat. As such, the gain would be taxable.
Is my Gain a Capital Gain or Business Income?
The answer to this question is: it depends! It comes down to your intent and that is what CRA would assess. Capital gains are accrued gains on an asset that is generally held for a longer period. Therefore, if you held bitcoin from 2014 and sold it in 2017, the long term holding period would support capital gains. However, if bitcoin was purchased and sold throughout the year in 2017 (i.e., multiple transactions) this would suggest an intent to generate business profits.
Also, the CRA looks for other factors to assess capital vs. business income treatment such as whether you are involved actively in the blockchain space, have a history of trading, etc.
How do I Track my and Determine my Cost for my Coins?
Based on the determination of capital gain or business income, the cryptocurrency would be considered capital property or inventory.
For cryptocurrency owned as capital property, the cost base will need to be tracked and if purchases are made each year, the cost base can be accounted for using the weighted average cost method. When the coin is eventually sold, the capital gain is reported on Schedule 3, Capital Gains (or Losses) on an individual’s personal tax return.
For cryptocurrency owned as inventory for active traders, inventory costing methods can be used to track the cost. FIFO or weighted average cost can be used to determine the cost of the inventory. When the coins are sold, the cost per coin sold would be expensed to determine the gross margins. For active trading investors, their crypto trading income will be reported on schedule T2125, Statement of Business or Professional Activities.
How are Capital Gains and Business Income Taxed?
For capital gains, 50% of the gain is taxed on an individual’s personal tax return at the marginal tax rates. Carrying charges and commissions can be deducted.
For crypto trading business income, the entire net profits are taxed at the marginal tax rates. Also, business related expenses can be deducted such as office space, commission, professional fees, and other business related expenditures.
What is my cost base for an Airdrop or Coins Received from a Hardfork?
For airdrops and hardforks, there is no cost for acquiring the coins. Therefore, when the coins are eventually sold, the entire proceeds would be an individual’s business income or capital gain.
How do I Track Coins that I am Mining?
For mining operations, cost accounting would apply. Mining is considered a business operation. As such the coins that are rewarded from mining is considered inventory. Tracking the cost of the coin would require determining the costs associated to mining the coin. For example, electricity, data centre fees, etc. are cost incurred to mine coins. As such, these costs would need to be allocated to the coins mined to determine the inventory cost per unit. When the coins are sold, the per unit cost of the coins would be expensed to determine the gross margin.