Bitcoin Hits New Highs – Time for Some Year End Planning with Crypto Assets

Geoff Currier with Excerpts from EverGreen Explanatory Notes

Immediately following the U.S. Election, the Bitcoin hit new highs.  New volatility may be in store for investors, and for those reasons it’s important to understand the tax consequences now and keep meticulous records.  Here’s why this matters to Canadian investors:

Crypto assets are a virtual asset which emerged onto the economic scene in 2009 when bitcoin made its debut as a decentralized and independent crypto currency. CRA has been tracking the tax consequences of these assets since approximately 2008, but it has relied on our system of self-assessment for personal tax reporting purposes.  That’s about to change, soon, and clients trading in these assets need to become educated quickly.

The Backdrop.  In an effort to provide international regulation, the Organization for Economic Cooperation and Development (OECD) developed a new framework for reporting crypto activity. It is called The Crypto-Asset Reporting Framework. (CARF). 

The  April 20, 2024 Budget proposes that Canada implement CARF in Canada and impose a new reporting requirement in the Income Tax Act on any crypto-asset providers who reside in Canada or who carry on business in Canada. The proposal includes crypto exchanges, crypto-asset brokers and dealers and operators of crypto-asset automated teller machines.

The Definitions.  Crypto assets can be bought through an exchange and held in a digital wallet. The history of transactions are tracked through what’s known as a blockchain. It's important to note that while the phrase crypto currency is in common use, for tax purposes in Canada, crypto currencies are regarded as commodities rather than actual currency. The means holding and trading these assets have tax  consequences; either as passive investments or as inventory in a business venture. 

The Reporting Requirements. Currently individuals or businesses trading in crypto-currencies are expected to self-report the activity either as business transactions or, in the case of individuals, as capital gains. Should your client have failed to report any activity, there are avenues available to go back and correct past returns or to submit to a voluntary disclosure program. 

Beginning in 2027 for the 2026 tax year, crypto-asset service providers would be required to report certain information to the Canada Revenue Agency, for each customer and each crypto-asset, culminating in the annual value of crypto currency exchange activities.  

Details of who is a party to the exchange, where and when the transaction was conducted, the value of said transaction.as well as the addresses associated with each digital wallet used, the beginning wallet balance (and its cost) and ending wallet balance for each crypto-asset for each year will be required. Clients, in other words, will need to be vigilant with proper accounting procedures.

Qualifying Assets for Registered Accounts.  In addition to the CARF, the April budget launched a consultation to consider making changes to the list of qualified assets that can be held in registered accounts such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs), Registered Disability Savings Plans (RDSPs), First Home Savings Accounts (FHSAs), and Deferred Profit Sharing Plans (DPSPs).

The consultation period ended on July 15, 2024.

Currently, qualified investments include over 40 types of assets such as mutual funds, publicly traded securities, government and corporate bonds, and GICs (Guaranteed Investment Certificates).  But the list is inconsistent across the range of registered accounts.  

For example, certain annuities only qualify to be held in RRSPs, RRIFs and RDSPs.  Amongst other issues, the government is also considering whether crypto-backed assets are appropriate as qualified investments for registered savings plans.

Next steps: While the Budget speaks about beginning the process of reporting under CARF for the tax year of 2026, it is more than likely your clients will need to have accurate records dating back at least three years and perhaps longer. If CRA has reason to believe that there may have been an effort to hide crypto-currency activity on the part of your client it could go back as far as seven years in your client’s returns. It is imperative that proper and thorough records be kept, whether by a business or by an individual trading in crypto-currencies. It is best to assume that the changes coming in the 2027 reporting year are already in place.