Are my Crypto Activities Business Income vs. Capital Gains?

Frequently, we get this request. My crypto trading should be taxed as crypto investing! Certainly, most people would like their crypto investing activities to be taxed as capital gains. However, the CRA does not have a dead set date or black and white rules. Instead, it uses a guide to weigh your crypto trading activities.

Two Common Misconceptions

A common misconception is whether the CRA has a one-year rule or not in order to determine whether the endeavour will be taxed as business income or capital gains.

Another misconception is whether a taxpayer can deem some transaction as carrying business or capital gains on a case by case basis, according to the taxpayer. This is not the case either.

Determining Capital Gains vs. Business Income

So how do you determine the difference between capital property and inventory? Here are three things to keep in mind:

THE NORMAL COURSE OF BUSINESS:
If the transaction is similar to the normal course of business, it may be considered business income.

THE FREQUENCY OF THE TRANSACTION:
The more frequently you engage in the transaction in question, the more likely the CRA will consider it on account of business.

THE ADVENTURE IN THE NATURE OF THE TRADE:
Income from an adventure or concern in the nature of trade is treated like business income. If what you are doing is an "adventure in the nature of trade," then your gain will be fully taxable.

You can also determine if the transaction is an adventure or concern in the nature of trade by and in accordance with Interpretation Bulletin IT-479R,:

• Frequency of transactions – you have a history of extensive buying and selling of crypto-assets
• Period of ownership – you hold your crypto-assets for a short period of time, and you turn them over quickly
• Knowledge of crypto-asset markets – you have knowledge of, or experience in, crypto-asset markets
• Time spent – you spend a substantial part of your time studying crypto-asset markets
• Financing – you finance your crypto-asset purchases by some form of debt
• Advertising – you advertise that you are willing to buy crypto-assets

Consult with a Crypto Tax Professional

This article is a general overview and should never replace consulting with a tax professional about your own and unique tax situation.