Reporting Virtual Currency Income
To correctly report your income from using virtual currency, you need to determine whether it constitutes business income (or loss) or a capital gain (or loss).
Business income (or loss)
If you frequently sell or trade virtual currency, you may be considered to operate a business. If so, you must include the value of your services or the exchanged goods in your business income, which is 100% taxable.
Likewise, if you accept virtual currency as payment in the course of your business activities, you must include the dollar amount you would normally have charged for the good or service in your business income.
If you operate a mining business and you received cryptocurrency, you must include its value at the time you received it in your business income.
If your virtual currency is considered inventory, you will have to estimate its value using one of the following methods:
- evaluate each item in the inventory using its acquisition cost or its fair market value (FMV) at the end of the year, whichever is less; or
- evaluate the entire inventory based on its FMV at the end of the year.
You must use the same method from year to year.
For more information, see guide IN-155-V, Business and Professional Income.
Capital gain (or loss)
If you use virtual currency but do not operate a business, we consider that your transactions give rise to a capital gain or loss. Generally speaking, you realize a capital gain when the FMV of the virtual currency at the time of the disposition is greater than its adjusted cost base (ACB). Half (50%) of a capital gain is taxable, whereas half (50%) of a capital loss is deductible.
Since virtual currency is property, you must determine the ACB of each type of virtual currency you hold (Bitcoin, Ethereum, etc.) in order to correctly report the capital gain (or loss) resulting from its use.
For more information, see guide IN-120-V, Capital Gains and Losses.
To take advantage of increases in the value of virtual currency, you buy and sell it regularly. In 2019, you purchased $200,000 of virtual currency. In 2020, you sold it for $240,000. Since you devote a considerable amount of time to trading virtual currency, you are considered to operate a business and must therefore report $40,000 in business income. This income is 100% taxable.
If you had acquired $250,000 of virtual currency in 2019 and sold it for $240,000 in 2020, you would have to report a $10,000 business loss. The loss would be 100% deductible.
In 2019, you acquired $300 of virtual currency. In 2020, you used it to buy a cell phone from a seller that accepts virtual currency. The FMV of the virtual currency was $500 at the time of the transaction. Since you do not operate a business, you must report a $200 capital gain. However, only 50% of the gain is taxable.
If the FMV at the time of the transaction were $200, you would have to report a $100 capital loss. You could deduct 50% of the loss.
In 2017, you purchased 3 Bitcoins for $25,000. In 2020, you traded them for 75 units of Ethereum. At the time of the trade, the FMV of your Bitcoins was $30,000.
We consider that you disposed of the 3 Bitcoins at the time of the trade. You therefore realized a $5,000 capital gain ($30,000 – $25,000), 50% of which is taxable. If the purchase price in 2017 had been $40,000, you would have realized a $10,000 capital loss ($30,000 – $40,000), 50% of which would be deductible.
In this example, the disposition did not take place in the course of operating a business. If it did, you would have to report $5,000 in business income or a $10,000 business loss.
In 2019, you operated a mining business and received 6 Bitcoins for your services. The FMV of one Bitcoin at the time was $10,000. In your business income, you must include the value of the 6 Bitcoins you received, for a total of $60,000 ($10,000 x 6).
In 2020, you decide to sell your 6 Bitcoins. The FMV of one Bitcoin at the time is $10,500, for a total value of $63,000. Since you are carrying on a commercial activity, you must report $3,000 in business income ($63,000 – $60,000). If the FMV of one Bitcoin at the time of the transaction in 2020 were $9,500, for a total value of $57,000 ($9,500 x 6), you would have to report a $3,000 business loss ($57,000 – $60,000).
Donating virtual currency
If you donate virtual currency to a registered charity or other qualified donee, you will be deemed to have disposed of the virtual currency for an amount equal to its FMV at the time of the donation. When calculating the resulting capital gain (or loss), the FMV of the virtual currency corresponds to the proceeds of disposition.
For more information, see guide IN-120-V, Capital Gains and Losses.