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Tax Minute – Cryptocurrency and Your Business
Did you know that only coins and notes issued by the Royal Canadian Mint are legal tender in Canada? That means that cryptocurrencies are not legal tender but are instead treated as a commodity. Knowing this, you might now ask: How can businesses accept cryptocurrency as payment for good and services, and what are the tax implications?
One could look at the exchange of good or services for cryptocurrency as akin to a medieval barter transaction. Viewing cryptocurrency transactions in this fashion makes the Canadian tax treatment of these transactions in your business easier to understand. For example, if you are in the business of selling widgets and you accept a crypto asset for the widget, the sale of the widget needs to be reported and GST collected. The sale would be reported at fair market value, i.e. the amount the widget would be sold to another customer for legal tender, and this amount would become the cost of the crypto asset in your books. If you use the crypto asset to acquire other goods or services, you will have a disposition of the crypto asset to record along with your acquisition of goods or services. In this case, the proceeds of disposition of the crypto asset and the cost of the goods or services acquired would be the market value of the crypto asset.
The crypto asset will most likely have changed in value from when it was acquired, which would result in a profit or loss at the time the good or services are acquired. Conceptually this makes sense until your accountant starts to ask whether the resulting profits and losses are fully taxable/deductible as business income or taxable as capital gains/losses. The answer to this question depends on a number of factors based on the specific facts of each taxpayer and each transaction and is therefore beyond the scope of this article.
Thankfully, with Bill C-30 receiving Royal Accent, a “virtual payment instrument” has been added to the definition of financial instrument for GST purposes which effectively exempts the supply of cryptocurrencies for GST. Prior to this legislation there was risk that transactions involving the supply of cryptocurrencies could have triggered double the GST/HST, as each transaction like the ones described above would result in both the disposition and acquisition of a taxable supply.
For those involved with cryptocurrency mining activities it should be noted that on February 4, 2022, the Department of Finance introduced draft proposals to the Excise Tax Act related to cryptocurrency mining that, once enacted, will have an effective date of February 5, 2022 and clarify that crypto asset mining will not be a taxable supply and ITC can’t be claimed.
There are many other non-tax issues that should be considered which are beyond the scope of our one-minute discussion. Needless to say, if you are considering accepting and using cryptocurrency in your business, the income and GST taxation policies are evolving. You should discuss this with your advisor prior to implementing such strategies.
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