Introduction:
Canadian residents earning cryptocurrency rewards from foreign platforms or investments must be aware of their reporting obligations under Canadian tax laws. The Canada Revenue Agency (CRA) requires taxpayers to report their worldwide income, including cryptocurrency rewards from foreign sources.
This article outlines how to report foreign crypto rewards on your Canadian tax return and the penalties for failing to comply.
What Are Foreign Crypto Rewards?
Foreign crypto rewards include earnings from staking, mining, yield farming, or participating in other cryptocurrency-related activities on foreign platforms. These rewards can take the form of:
- Interest earned from staking or lending crypto.
- Rewards for participating in DeFi projects or yield farming.
- Mining income from mining cryptocurrency on a foreign platform.
Tax Treatment of Foreign Crypto Rewards
- Worldwide Income: As a Canadian taxpayer, you are required to report all worldwide income, including cryptocurrency earned from foreign platforms. These rewards must be reported in Canadian dollars, and the CRA expects the fair market value of the rewards to be determined at the time they are received.
- Income or Capital Gains: The CRA treats cryptocurrency rewards as income when received, but when you dispose of them, any increase in value is treated as a capital gain. This means you’ll need to calculate both the value at the time of acquisition and at the time of disposal.
- Foreign Asset Reporting (T1135): If the total value of your foreign-held cryptocurrency exceeds CAD 100,000 at any point during the tax year, you must file a T1135 Foreign Income Verification Statement. This form is required to disclose foreign investments and assets, and failure to file can result in penalties.
How to Report Foreign Crypto Rewards
- Convert to CAD: Any foreign cryptocurrency rewards must be converted to Canadian dollars using the exchange rate at the time the reward was received. This ensures compliance with CRA’s guidelines.
- Use Schedule 3 for Capital Gains: If you dispose of the foreign crypto rewards, report the transaction on Schedule 3 of your tax return to calculate any capital gains or losses.
- T1135 Filing: For those holding foreign cryptocurrency assets over the reporting threshold, file a T1135 to disclose foreign investments and income.
Penalties for Non-Compliance
Failure to report foreign crypto rewards or to file a T1135 can result in significant penalties. The CRA imposes both late-filing penalties and interest on unpaid taxes. It’s crucial to ensure that all foreign crypto activities are reported accurately.
Conclusion
Canadian taxpayers earning cryptocurrency rewards from foreign platforms must report these rewards as part of their worldwide income. Proper reporting includes converting earnings to Canadian dollars and ensuring compliance with foreign asset reporting rules. By understanding these requirements, you can avoid penalties and ensure full compliance with the CRA.
If you have any questions or require further assistance, our team of accountants at Tax Partners can help you.
Please contact us by email at info@taxpartners.ca or by phone at (905) 836-8755 for a FREE initial consultation appointment.
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