Updated: Dec 25, 2022
You may have tried to find out how your crypto mined needs to be taxed, but to no avail, there is limited information online. That is because the tax law around crypto is still being developed and mainly CRA guidance is available which seems too vague and doesn't seem to provide enough details that encompass the complexities of the crypto world.
However, with tax season rolling around, we need to report our taxes and the best we can do is to report a reasonable position based on current tax legislation and guidance. I've compiled various CRA guidance and interpretations, as well as end with what I believe to be a reasonable reporting position so make sure to read until the very end!
Crypto Mining Tax Implications
Before we start, if you are wondering whether you even have crypto mining tax obligations - make sure to check out my post here on how to differentiate between a hobby and a business. If you determined your crypto mining operations to be a business activity, then let's dive into the potential tax implications.
There is currently no rules enacted on how crypto tax should be treated. What we do have are CRA guidance and tax interpretations - which are not tax rules that have been enacted but how CRA views a certain tax position.
So to reiterate, the Income Tax Act and Court Cases are considered primary sources, whereas CRA guidance and tax interpretations are considered secondary source, and can change over time. This was the case in two Tax Interpretations from the CRA in 2014 and 2018 that had two different positions on how Crypto Mining should be taxed.
The first TI in 2014, CRA viewed crypto mining similar to an actual mining business (ie. gold mine) in which revenue would be recognized when the crypto is actually disposed of. This could potentially delay the recognition of taxable income at a later date vs. when the crypto is actually mined.
However, in the second T1 released in 2018, CRA viewed crypto mining as a service in which the miner validates transactions on the blockchain network in exchange for a specific cryptocurrency. Therefore, revenue is recognized when the miner is compensated with the crypto, regardless of whether you actually decide to sell or hold the crypto after it has been mined - this is the first taxable event.
After crypto has been mined, there can also be a separate taxable event later down the road when you sell, exchange or buy goods/services with it. Let me breakdown the different taxable events based on the crypto mining life-cycle.
Life-cycle of Cryptocurrency
There are three stages in the life-cycle of cryptocurrency in commercial mining operations, which each have their unique tax implications.
Stage1 - Earning Crypto
As mentioned previously, more recent guidance by the CRA as well as other tax experts' opinions are that of crypto mining being a service. Therefore, the revenue is recognized at the time the crypto is mined. A miner would typically receive payment in form of a newly created crypto and fees from the transactions from the newly validated block. However, this can be complicated to report if you don't know how much to report as revenue.
Since crypto is considered a commodity (not currency) by the CRA, the service of validating crypto in exchange for crypto is considered a barter transaction. In a barter transaction, you would either bring into income the value of the service rendered or the value of the good received.
Since it would be difficult to value the service of crypto mining, what is more readily available is the value of the crypto received. Therefore, a reasonable approach to bringing into income is by taking the fair market value of the crypto mined in Canadian dollars, as listed on a reputable crypto exchange.
Stage 2 - Holding Crypto
After revenue is recognized from earning crypto, you would typically hold crypto until you dispose of it. There is also a question of how to value the crypto, which really comes down to two classifications: inventory or capital. Further analysis would need to be done in order to determine the initial intention of the miner at the time the crypto was earned based on the following general factors:
Frequency of transactions
Duration of holdings,
Intention to acquire for resale at a profit
Nature and quantity of securities, and
Time spent on activity.
In a nutshell, if you were to look at a real estate business in which you are flipping homes, in this case the real estate property would be considered an inventory. On the otherhand, real estate property can be held as a long-term investment property, in which case, it would be considered as on account of capital.
In the case of inventory, crypto would be valued by using one of two methods:
Value each item at cost when it was acquired or fair market value (FMV) at end of year - whichever is lower
Value entire inventory at FMV at end of year (ie. price that you would pay to replace an item OR amount you would receive if you sold an item)
FMV is relatively straightforward to calculate as it can be determined to be the market value of the crypto. As for cost of inventory, it would include mainly costs of purchase (I'm assuming this includes the cost bump from recognizing in revenue) and cost of conversion, related to direct costs (ie. electricity) as well as fixed and variable costs (ie. salaries, rent on location for mining equipment, insurance, depreciation of mining equipment).
Any costs that are considered to be capital in nature (ie. has a "lasting benefit") such as a computer hardware would need to be capitalized and depreciated. You can pool the costs and average the total inventory costs across the number of units held for the same coin only. This calculation can get complicated if different crypto is mined as the costs would somehow need to be separated.
Considering the price volatility of crypto, you would also need to consider at the end of each year whether the FMV of crypto is less than the price of crypto. If it is, you would need to write down the balance of crypto on your books at the FMV based on the price of the crypto, which is deductible for tax purposes.
Capital property is valued at the cost of the property, which can be assumed to be the FMV at the time the crypto was mined since this was revenue recognized for tax purposes.
Stage 3 - Utilizing Cryptocurrency.
When it comes to actually using or disposing of crypto, it all comes down to how it was treated in Step 2 as either a capital property or business property (ie. inventory). If it was held as capital property, then there is a favourable treatment of only 50% inclusion of the capital gain. On the flip side, if you have capital losses, you also only report 50% to offset against other capital gains only.
However, if you treated your crypto as inventory, that it is treated as a business property, thus business income. Any gain or loss will be included at 100%, so fully include the income or you can deduct the losses against any other sources of income.
Utilizing crypto can mean that you sold it for fiat currency, you exchanged it for another crypto, or you exchanged it for goods and services.
Disclaimer: To properly determine your tax situation, make sure you consult with a tax advisor as this video does not constitute tax advice and is merely for informational purposes only.
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