Crypto Mining Tax - Hobby vs Business?
Updated: Dec 25, 2022
Have you started mining crypto, even made some money, and now you are wondering if you need to report it to the CRA?
We would need to take a step back and first define the scale of your crypto mining operations and determine whether it is actually a hobby or a business to determine whether it is taxable in the first place.
Hobby vs. Business
Based on the limited guidance provided by CRA, income tax treatment for cryptocurrency miners would differ depending on whether their mining activities are a personal activity (a hobby) or a business activity.
The main difference being, that hobby activity is not taxable whereas business activity is, and to determine this, you would need to look at the facts and circumstances as there is no clear definition (no surprise there).
A hobby is generally undertaken for pleasure, entertainment or enjoyment, rather than for business reasons. But if a hobby is pursued in a sufficiently commercial and businesslike way, it can be considered a business activity and it will be taxed as such.
To determine whether an activity is a hobby, the CRA would refer to the Reasonable Expectation of Profit (REOP) test, which would look at the following criteria:
The profit and loss experience in the past years;
The taxpayer’s training;
The taxpayer’s intended course of action; and
The capability of the venture, as capitalized, to show a profit after charging capital cost allowance.
More recent Supreme Court of Canada cases have evolved and instead go by a two-stage approach as follows:
Is the taxpayer’s activity undertaken in pursuit of profit, or is it a personal endeavour?
If it is not a personal endeavour, is the source of the income a business or property?
The first stage is only relevant when there is some personal or hobby element - if the activity is clearly commercial, then pursuit of profit is already established. If there is a personal element to it, one additional step needs to be taken to determine if there is sufficient commercial motive.
For example, there may be an intent to make profit and show "businesslike" behaviours. Both personal enjoyment and business element may co-exist, but the personal component should substantially displace the business aspect in order to conclude that that the activity is just a hobby.
If based on above, the activity is concluded to be merely a hobby, then there shouldn't be an intention to earn profit and any income from the hobby should not be subject to tax nor the expenses deductible. However, it the activity is determined to be a business, the income would need to be reported as business income and associated expenses are deducible.
To give you a better idea as to where you might fall under as a crypto miner - there are four broad categories:
Micro Miner - you are just using your home computer to mine crypto
Small Miner - you only utilize a few GPUs to mine out of your own home
Medium Miners - you work with others or a team and use an ASIC or large banks of GPUs.
Large Miners - you work with others and use hundreds to thousands of ASIC/GPU miners in dedicated facilities
Clearly, if you fall under medium to large miners, the extensive operations would indicate commercial activity. However, you will probably not be watching this video if you do fall under those categories, rather you may fall under one or two, which requires further analysis to determine if there are any commercial elements.
As discussed above in the two factors the CRA will look at, we need to see if there is a personal element that is for pleasure, entertainment or enjoyment. Other than for your scientific curiousity, it is difficult to conclude that mining is substantially a personal endeavor as:
(i) mining can be capital and energy intensive, making it financially difficult to mine for merely personal pleasure, and
(ii) the actual mining itself doesn't really require any human interaction, so it's difficult to prove where you are obtaining pleasure, entertainment or enjoyment from the process.
Even if there is a personal element to it, we would also need to consider the miner's intention for profit. Generally, the intention behind crypto mining is to earn coins that will be worth more in the future compared to the cost incurred to produce them. In this sense, a miner's intent on mining crypto is to inherently earn a profit, making it a commercial activity.
That being said, if you have just been incurring costs and haven't been successfully been earning a profit, you can't simply claim you are running a business and claim the deductions.