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Selling, trading cryptocurrency a 'taxable event'

Although taxpayers trading bitcoin for another cryptocurrency may think they do not have to report the transaction, they need to be aware that in the eyes of the Canada Revenue Agency (CRA), a swap constitutes a taxable disposition, Canadian tax lawyer David J. Rotfleisch tells AdvocateDaily.com.

Indeed, swapping one cryptocurrency for another and failing to report the trade is one of the most common pitfalls for taxpayers when it comes to buying and selling bitcoin, says Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation

“If you hold bitcoin there is no income to report. However, if you trade bitcoin for another cryptocurrency or sell for cash you have a taxable event. The transaction will be either a capital gain or taxable as income depending on the normal complex rules for determining capital gains versus ordinary income,” he says.

“Some of the relevant factors are volume of transactions, frequency of transactions, expertise in the field and use of borrowed money,” adds Rotfleisch.

Rotfleisch, who says his firm receives multiple enquiries every day about the taxation of bitcoin and other cryptocurrencies, notes that the Income Tax Act does not specifically deal with cryptocurrency, so there is a lack of information about how and when tax has to be paid on these transactions.

“There is nothing specifically in place dealing with bitcoin. The CRA takes the position that bitcoin is similar to a commodity such as silver or gold, so the same rules apply,” he says.

Although Canada has a self-reporting system that requires taxpayers to report any trades, Rotfleisch says the blockchain also records all ownership information, making it traceable by tax authorities. 

“The IRS in the U.S. is reported to have software to trace and audit ownership of cryptocurrency,” he adds.

Heading into tax season, Rotfleisch says taxpayers should be sure to report any sales or trades of cryptocurrency that took place in 2017.

“If sales or trades took place in prior years and were not reported, then a voluntary disclosure should be considered, he adds.

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