Today I'd like to talk about a topic that I've been sort of avoiding for the last few weeks, but I can't avoid it anymore - cryptocurrency.
I'll admit I am a crypto hater. I think it's flawed, but maybe I don't understand it as much as I should. However, I definitely know that a lot of people that are investing in crypto also don't understand it. Thus, I think my conclusions are valid.
The taxation of cryptocurrency is something that an increasing number of our clients have been asking about recently. So let’s quickly go through the different types of income that can be associated with cryptocurrency.
The obvious one is capital gains. So if you treat it as a commodity, which means that you are buying cryptocurrency with the hopes to sell later on, then that would be a capital gain or a capital loss, and taxable at 50% multiplied by your marginal rate. The crypto exchanges that we've seen so far have been, for the most part, awful with their reporting and how they give their clients information. Every time that you exchange crypto for crypto, or you exchange crypto for a normal currency, that is a transaction, and that is something that needs to be recorded and kept track of.
Some of these exchanges are just absolutely awful.
They don't present the information in a way that is easily readable or understandable. My own clients (and sometimes even us ourselves) have to do a good amount of digging to figure out what exactly they mean. The only one that I've seen so far that I actually enjoy is Wealthsimple. Note that I'm not an advocate for them — I don't use Wealthsimple myself — but I know that their reports are clear, concise, and straightforward. They report the things that you're supposed to report.
The other kind of income that you can have with cryptocurrency is business income.
I have one client that mines cryptocurrency themselves. This person went out and spent a bunch of money buying processors in order to process and mine the coin. They receive that coin and then sell that coin.
In that particular business, because they mine it, a major portion of their income is actually business income, and it's treated much differently. It's taxed at 100% multiplied by your marginal tax rate (capital gains are 50%, business income is 100%). So if you are mining coin actively, then that would be business income.
I'm sure the majority of accountants out there are going to try to classify all cryptocurrency exchanges as capital because of those tax rules. Some are just going to be unavoidable, and it will be business income.
If you have a tax return that hasn't been done yet, and you have cryptocurrency on it, I strongly advise you to go talk to your accountant and make sure you're doing it properly.
Who knows? If you're one of those unlucky people that lost money on cryptocurrency in 2021, there might be an opportunity for you to recoup some capital gains that you've had in the past three years. It's important to get it right, even if you lost money.
Bryan Petersen is an accountant and entrepreneur with over 20 years of experience mentoring small and medium businesses across Alberta. Learn more about working with Bryan and the dedicated team at Alberta Wide Virtual Accounting.
