Cryptocurrencies and taxes

With the latest hype around Bitcoin prices, there is a question of how to declare your income on Bitcoin trades.

Although CRA doesn’t specify the taxation mechanism of Bitcoin and other digital currency, they apply commodity rules to it. This means if you are actively trading your digital currency you need to treat it as a security. You must declare capital gain on the trade of cryptocurrencies.

There are cases where individuals trade a substantial number of very small units of Bitcoin or other currencies. Often it is very time consuming or sometimes impossible to track each unit unless you use the very sophisticated software. Units are sold in batches. In this case, you need to apply an inventory approach, as FIFO, LIFO or average, and match the cost to the sale proceeds. It means we are combining two different taxation methods: commodity method where capital gain is calculated on the sale of each item; but the cost is determined based on the inventory calculations, which are usually used in determining business income. Since CRA has not developed extensive regulations around the cryptocurrency income, you have a choice of what would be the inventory method to use in determining the cost of the sold units.

Personally, in order to eliminate CRA questions, I use average cost for the year.

I would welcome any comments to this blog.