You may be aware that Crypto is a taxable commodity in Canada. Like income from trading crypto, income from crypto mining is also taxable. To get to an answer about your specific tax situation you will need to go through a series of questions first. Think of it as a decision tree. There is no one size fits all approach to reporting your mining activity.
You may have some questions running through you mind, like:
What exactly is reportable?
How much is taxable?
When does the income arise?
How do you calculate it?
How much tax do you pay?
Because this is an evolving area of tax, the CRA is working on it as we speak.
In this blog, I will lay out how the CRA would want us to deal with mining at this moment based on the guidance they have provided to date.
The questions below are written from the lens of what the CRA will look for when evaluating your return.
Let’s dig in.
Question 1: Is my mining a commercial activity or a hobby?
This one is actually pretty simple in the case of mining, because most miners do it in order to generate a return. Setting up even a small mining rig isn’t cheap, so I am going on the assumption (as will the CRA) here that your mining activity is likely not a hobby.
What this means is that any income you earn from mining will be treated as business income.
Question 2: What is the income earned from mining?
To frame this question another way: at what point do you have income that needs to be reported?
This is where the gray area comes in. When you have successfully mined a crypto asset, you are rewarded with some newly minted coins. You can of course then sell those tokens for other cryptocurrencies including stablecoins, or for fiat like CAD.
A bit of a backstory...
A few years ago the CRA stated that when you mine the coins, you have created inventory. You only earn income once you sell or otherwise convert this inventory (at a later date). If you mined some coins in 2019 and sold them in 2020, you don’t have any income to report (or tax to pay) until 2020.
But more recently, the CRA has come out with a contradictory opinion. They seem to prefer the view that your mining is a service you’re providing. The coins you get are thus income as soon as you receive them. Totally different. This appears to be the view they’re going with,(at least for now).
What it means is that you have to report the value of your mined coins as income. Of course you have to report everything in CAD, which means you have to figure out the value of those coins in CAD at the moment you receive them.
Your mining is a service you’re providing in the eyes of the CRA. The coins you get are thus income as soon as you receive them.
Question 3: What happens when I sell or swap mined coins?
Unfortunately the answer here is: It depends on your specific situation.
So let’s say you’ve mined some crypto currency in 2019. You figure out that the value of this mined currency is $50K CAD and you report this as business income on your 2019 return. You then pay tax on it at your marginal tax rate.
Now what if you then cash out (or swap or use) this mined crypto currency in 2020 and when you sell it it’s worth $60K CAD.
The good news is that since you’ve already paid the tax on the $50K, you don’t have to pay tax again on the whole $60K.
The bad news is that you do have to report the disposition and you do have to pay tax on the additional gain or income realized on the sale. In most cases this will be the additional $10K that the currency grew since you mined it in 2019.
Now there is a secondary question here, which is how much of the gain will be taxed. This will depend on whether the $10K in growth is further business income or instead a capital gain.
You can read my earlier blog on the difference between capital gains and business income. If it’s a capital gain, only half (or $5K in our example) would be taxed. If it’s business income, all of it would be taxed.
The interesting (read: weird) thing is that even though the original value of the mined crypto was treated as business income, the growth realized on the subsequent sale of that same crypto might still be treated as a capital gain.
It really comes down to your intention in holding the mined crypto after you’ve received it and how well you can back up your claim to the CRA.
If you generally mine and then sell the reward tokens - that’s your trend and your practice - then they would probably be treated as business inventory, and any gain on their sale will be business income, fully taxable.
But if you normally hold these mined tokens long term, perhaps lending or staking them to earn other income, then they may be considered capital assets. When you do end up selling them you get a capital gain, only half of which is taxed.
In a nutshell: no nutshell here. A full analysis of your specific situation is required to determine how and how much tax you will pay.
Question 4: How do I determine the cost of mined crypto?
If you’ve read my blog on gains and losses, you know how important it is to have the correct cost for your crypto assets. You need these amounts in order to come up with the accurate gains or income numbers for your tax returns.
When your coins are from mining, there are a few extra layers to unravel to get to the cost that the CRA will accept.
The starting point will be the CAD value of the mined currency at the time you mined it. Chances are you don’t just mine for a day or a week and then stop, so the value of the coins will vary as the market price of the currency you’re mining fluctuates. You’ll need to keep track of the weighted average cost for a particular crypto asset.
Now if your mined crypto is considered to be held as a capital asset (see question 3 above), then you stop there. The weighted average cost of the given crypto currency will be the Adjust Cost Basis (or ACB) that you’ll use to calculate the capital gain when you later sell the asset.
If your mined currency is considered business inventory (again, see question 3), then I’m afraid you may need to make further adjustments.
For crypto that’s held as inventory, you have to choose one of two cost methods that CRA will accept:
1. You leave the crypto asset cost at the original cost value (i.e., the weighted average cost above), unless it drops in value. If it drops in value you report a loss and reduce the cost down to the lower value.
2. You always revalue the crypto to its market value at the end of each year. Any gains or losses on the revaluation you report on your tax return.
Whichever method you choose, you have to stick to it. You can’t pick lower-of-cost-and-value for one crypto currency one year, and then pick market value for another asset or for the same asset in another year.
The Bottom Line
The Canadian taxation of crypto mining is a confusing space. Depending on some very soft factors, the same transactions may be treated very differently. This can result in significantly more or less tax payable.
Every case really does need to be looked at in detail to make sure you’re reporting properly and optimally.
That being said, for most of you solo miners out there, the most likely scenario will be:
You’re not mining as a hobby, it’s a business and the income has to be reported as business income
The value of the mined currency will need to be reported at its value when mined in CAD using weighted-average-cost.
The gain on subsequent sale of the mined coin will also need to be reported. Whether it will be 100% or 50% taxable will depend on whether you generally sell or hold these assets.
About the author: Yuriy Lozynsky is a CPA and the founder of Deixis, a Canadian accounting firm specializing in crypto currency tax compliance.
The information provided in this blog is general in nature and solely for educational purposes. Viewers use and implementation of the information comes at their own risk and is their own responsibility.