Do you know Changpeng Zhao? He’s the CEO of cryptocurrency exchange Binance, and has a net worth of US$96.9 billion. This number makes him the wealthiest Canadian, as well as the richest crypto entrepreneur.
You may have heard a little (or a lot!) about cryptocurrency lately, and are wondering how it might affect you as a small business owner. In this blog, we’ll cover the basics of cryptocurrency, whether your business should use or invest in it, and of course, tax considerations.
What is cryptocurrency?
Bitcoin and Ethereum are the most known forms of cryptocurrency. Cryptocurrency uses blockchain technology, or a digital ledger, to let individuals and businesses conduct transactions directly without an intermediary like a bank. The transactions are anonymous, and usually have no fees. The digital ledger, however, is available to everyone in the network – this means that each member of the network can see every account’s balance.
Because cryptocurrency isn’t tied to any specific country, it isn’t subject to government regulations the way that legal tender is.
CPA Canada’s Transacting in crypto-assets for small and medium-sized enterprises (SMEs) is a great primer with lots of useful information for small businesses.
Should your small business accept cryptocurrency?
We’ve had clients ask about this. As a small business, you might choose to accept cryptocurrency for many reasons – competitive differentiator, lower processing fees, etc. But is it right for your situation?
At this point, cryptocurrency is a store of value and not a functional currency that’s backed by the government. Because the price is so volatile, the value can change quickly, and accepting it would be too risky for most people’s appetite.
For example, if you exchange $1,000 in cryptocurrency for products or services, you may wake up the next morning and find that it’s only worth $500 (thus, losing your profit).
It’s also difficult to convert cryptocurrency back into fiat money or Canadian dollars without a lot of fees or time. You’d have to use one of the following:
- Bitcoin ATM
- Online crypto-asset exchange or over-the-counter markets
- Barter exchange with another individual
- Crypto-asset payment processor
Crypto-assets are not as liquid as most business owners would want or need it to be. Until the coin that you're using gains momentum as a functional currency, it’s probably not worth it for you to accept it at your business.
Lastly, cryptocurrency isn’t 100% safe. Because the market is unregulated, recovery of investments due to fraud or theft is limited. If you do decide to use it, make sure you enable multi-factor security on your accounts.
If you’re still looking into accepting cryptocurrency, Request Network has built a Xero integration to send crypto invoice entries to Xero automatically.
Investing in cryptocurrency through your corporation
Some businesses use cryptocurrency with the goal of generating investment returns. If you’re wondering how to buy cryptocurrency in Canada, read on.
You can choose to invest as an individual or through your corporation. A corporation can do anything an individual can, in terms of investing. It’s free to open an account, but remember that corporations are a separate legal entity.
The main costs related to investing in cryptocurrency are the transaction fees. These include fees charged by crypto-asset exchanges for conversion to and from fiat currency, and for buying and selling crypto-assets on the exchange.
When selecting a credible and reputable cryptocurrency exchange, you should look at cost, the liquidity of the exchange, and its security.
Coinberry is a Canadian digital asset trading platform that provides users an easy and safe way to buy and sell Bitcoin, Ethereum, Litecoin, Bitcoin Cash and Stellar in Canada.
NDAX is an Alberta-based cryptocurrency exchange that is fully integrated into the Canadian banking system, created with retail and institutional clients in mind.
Whether you are using cryptocurrency for transactions or investment, you should:
- Make sure you understand the risks and benefits.
- Do your research. Sites such as CoinMarketCap and CoinGecko are great places to start. Look at a coin’s reputation, market capitalization, recent volume and news, social community, public team profiles and executive experience and backgrounds.
- Set up a strong internal control environment to ensure the security of your crypto-wallets and private keys, as well as the integrity of underlying transactions.
- Consult with an accountant on the appropriate accounting and tax treatments.
CPA Canada shares some things to keep in mind in Crypto 101: What you need to know before investing.
Cryptocurrency tax considerations
Business income or capital gain?
Buying or owning cryptocurrency itself is not taxable. But when you sell it or exchange it for something else, it is a taxable transaction. Here are some examples:
- If you have Bitcoin and trade it for Ethereum, it's a taxable event.
- If you convert Bitcoin into U.S. or Canadian dollars, it's a taxable event.
- If you make a purchase with Bitcoin, such as a car, it would be considered a barter transaction, and it would be a taxable event.
You may wonder whether investment gains are considered business income or capital gains. If you are trading on a regular basis, and your trading income is greater than your other income, it would be considered business income, as opposed to capital gains. If investing in cryptocurrency is more of a hobby, any gains would be considered capital gains.
Find additional tax information in CRA’s Guide for cryptocurrency users and tax professionals.
How to track your transactions for tax purposes
If you are doing many cryptocurrency trades and transactions, you’ll need to track this information for CRA purposes. While you can do this manually in a spreadsheet, it’s a lot of work.
Koinly can download all your transactions for you, and tracks your trades, gains and losses.
Wealthsimple Crypto is another option.
If you have cryptocurrency worth over $100,000 at any point, you’ll need to fill out The Foreign Income Verification Statement (Form T1135).
Tax tips for cryptocurrency: a recap
- Understand that cryptocurrency is volatile (and be prepared).
- It can be difficult to turn back into cash instantly.
- There are tax consequences when you trade, buy, sell and earn.
- Never invest more than you are willing to lose.
- Do your research – the “rags to riches” stories don't happen overnight.
There are many apps, and it’s really easy to put money into cryptocurrency, but should you? If you have a corporation, and are looking to invest, set up a meeting with one of our trusted CPAs. We’ll chat with you about your unique situation.
Did you find this blog helpful? Read more about Small Business Basics topics that may be relevant to you and your small business.