Mastering Crypto Accounting and Taxes in Canada A Quick Guide 2023?
Canada has been ever-so enthusiastic about crypto assets. The world’s first crypto ATM opened in Vancouver in 2013. However, when compared to the US, Canadian investors have been more risk-averse, especially in light of dynamic regulatory, crypto accounting and tax landscape pertaining to cryptocurrency. It is now emerging as the hotspot for cryptocurrency mining with the gradual increase in investing in crypto assets Crypto Accounting.
Accurate accounting of crypto assets demands a nuanced understanding of both traditional accounting principles and the newly emerging changes being made by concerned regulatory authorities Crypto Accounting.
The process becomes even more cumbersome owing to complex verification of multiple transactions on the blockchain occurring on a real-time basis on multiple trade platforms. The specialized experts, crypto CPAs or crypto accountants have proprietary knowledge and experience to help investors of crypto assets in the blockchain industry.
Let’s understand the basics Crypto Accounting
The Canada Revenue Agency (CRA) treats cryptocurrency or crypto assets as digital assets and not legal tender. For the purpose of crypto accounting and taxation, the CRA treats crypto assets as a commodity. Any income generated from transactions or trading of crypto assets would be characterized as business income or capital gains Crypto Accounting.
The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) mandates reporting for ‘large virtual currency transactions’ exceeding the threshold of $10,000 (Canadian dollars). Canada also has anti-money laundering (AML) regulations and Know-Your-Customer (KYC) norms in place. As any reporting entity, one must comply with the Proceeds of Crime (Money Laundering), Terrorist Financing Act and allied laws. It is crucial to keep abreast of all regulatory updates pertaining to crypto assets and consequences on holding and trading them.
The Canadian Income tax system is based on self-assessment, which means each individual / entity has to study the accounting and tax laws, declare and assess its income which will then be reviewed by the tax officers. Now, it is mandatory for all Canadian citizens to file their taxes by April 30, 2023.
As mentioned above, for the purpose of crypto accounting and taxation, the CRA treats crypto assets as a commodity. Any income generated from transactions or trading of crypto assets would be characterized as business income or capital gains. Hence, in case of crypto mining, it has to be seen whether this activity is being done as a hobby or adventure or serious business activity. Last week, the CRA clarified that crypto assets or non-fungible tokens (NFT) held or used in an adventure, CRA will consider that such transactions are not forming part of ‘active business’.
Crypto Accounting The CRA has not provided or published any special valuation method. The only guidance available with respect to valuation of such crypto assets is that a reasonable method must be consistently used and there should be sufficient evidence to showcase usage of such methodology. Although not mandated, the CRA entertains and accepts fair valuation methods. Different kinds of ‘dispositions’ of crypto assets attract differential tax treatment. For example, a barter of crypto assets is a distinct kind of disposition where the valuation of both transactions needs to be undertaken and accounted for.
Accurate valuation of crypto assets is also integral for risk management to maintain the financial health of individuals and businesses. Hence, realistic assessment Crypto Accounting of values is advised by all crypto CPAs and should not be ignored.
While only 50% of capital gains are subject to capital gains tax, entire business income is taxable. Hence, correct characterization under the right head of income becomes important.
Further, various expenses like electricity costs, equipment depreciation, repair costs, etc can also be claimed as deductions, provided there are supporting documents and appropriate linkage. Taxpayers may also set-off and deduct crypto losses from sale of crypto assets from your total taxable income. All realized and unrealized gains and losses must be tracked which forms part of the crypto reconciliation process Crypto Accounting.
Interestingly, there are certain cryptocurrency dispositions that are tax-free as declared by the CRA. These include simply purchasing and holding the crypto asset, receiving crypto assets as a gift, and transferring crypto assets between their own digital wallets.
Overall, there can be various tax strategies in order to minimize one’s tax exposure on digital asset investments, while also complying with financial reporting, tax and also regulatory issues.
Where crypto assets are held as capital, the crypto accounting of the same needs to be done on an adjusted cost basis in order to accurately record capital gains at the time of disposition. However, if the crypto assets are held as inventory (for example, for crypto exchanges), valuation methods change. One of the following two methods are prescribed:
i. Value each item in the inventory at its cost when it was acquired or its fair market value at the end of the year, whichever is lower
ii.Value the entire inventory at its fair market value at the end of the year (generally, the price that you would pay to replace an item or the amount that you would receive if you sold an item)
The CRA has also amply clarified that here, ‘cost’ as used above means ‘cost at which the taxpayer acquired the property’. In other words, it is the original cost of the particular item of inventory (for example, a block of cryptocurrency), plus all reasonable costs incurred to buy that particular block of cryptocurrency.
Maintaining records is also an important mandate. These records include but are not limited to date and time of transactions, receipts, recorded justification for the choice of valuation method, crypto addresses and other relevant information of other parties involved, exchange records and all digital wallets in which crypto assets are held by the investor.
A crypto miner should also keep other records like receipts for the purchase of the cryptocurrency mining hardware, mining pool details and records, etc. Due to various wallets and exchanges through which one can diversify the crypto asset holdings, all crypto transactions need to be reconciled in a proper manner. Any omissions or incorrect valuations would invite CRA’s attention to violations and could lead to penal consequences.
Crypto reporting is to be done in a different form, as prescribed by the CRA (Form T1135) when an individual or business holds cryptocurrency ‘situated, deposited or held outside Canada’. This determination itself is highly complex and was clarified by the CRA last week. It depends on the manner of holding and involvement of an intermediary.
A thorough review of documents, circumstances and relationship existing between the intermediary and the investor needs to be analyzed closely. Here, crypto trading platforms have additional compliances for offering crypto asset services in Canada. Further, even non-fungible tokens have to be declared on this very form Crypto Accounting.
Crypto Accounting Software
There are various types of crypto accounting software currently in the market, each with its own features and technological advancements to track and maintain accounts related to crypto assets. Crypto Accountants are experts in leveraging accounting software that are integrated with crypto exchanges along with several kinds of crypto wallets.
It is noteworthy that the CRA is capable and technologically empowered to trace crypto transactions. It is the best-case scenario to assume that CRA has full transparency and access to all crypto asset related data and then proceed by remaining fully compliant.
Let us be your crypto accounting experts
Accurate accounting and crypto bookkeeping which are known to be extremely volatile currently, is a necessity for any interested stakeholder. As described above, the financial strategies attached to this volatile environment of crypto assets is significant today. It has wide repercussions on boosting investor confidence and building stakeholder trust. With the CRA’s lens on such transactions and focused audits, the accounting and taxation of crypto assets are some pressing issues in today’s cryptocurrency landscape. Let us help you navigate crypto accounting and crypto taxes. Our team of experts is available to assist you to remain compliant and peaceful. Contact us today and schedule a meeting with us!