David Rotfleisch on Cryptocurrency Stablecoin Taxation

Taxation of Stablecoins

For the past several years, the crypto market has exhibited extreme volatility. In actuality, it ranks among the most erratic non-derivative financial assets available. For instance, a single tweet from Elon Musk might cause the price of a Bitcoin to shift by more than 10% in a single day. On the other side, stablecoins have grown significantly as a result of their stability. A specific kind of cryptocurrency known as a “pegged” cryptocurrency is one that is linked to a more reliable reserve asset, such as fiat currency or precious metals. Stablecoins play a crucial role in the operation of the world’s cryptocurrency markets since they enable markets to maintain a healthy level of liquidity without holding any cash. Tether (USDT), the most popular stablecoin, is actually used to perform 70% of Bitcoin trades today. With 95% of the total supply of Tether released since the beginning of 2020, there are currently 78 billion units in circulation. Tokens issued by Tether Limited, which is in turn controlled by the owners of Bitfinex, are used to host the Tether cryptocurrency on the Ethereum blockchain.

While Tether claimed in a 2021 settlement with Letitia James, the New York Attorney General, that “Tether represents to users that any holder of tethers can redeem them from Tether the company at the rate of one tether for one US dollar,” Tether Limited claimed in a 2017 statement that holders of tethers have no contractual right, other legal claims, or guarantee that tethers will or can be redeemed or exchanged for dollars. Each tether, according to the legal representation for Tether Limited, is backed by $0.74 in cash and cash equivalents as of April 30, 2019. A report that Tether released in May 2021 revealed that over 65% of Tether’s backing was comprised of commercial paper, including loans to connected entities like Bitfinex, and that just 2.9% of Tether was backed by cash.  Because of this and other factors stablecoins realized a price drop in the second quarter of 2022.

How Stablecoins Operate Effectively

In contrast to Bitcoin and Ethereum, which are frequently held as long-term investments, stablecoins are created to be used regularly in order to promote widespread adoption of digital currencies. Stablecoins are not expected or designed to grow in value over time due to their constant worth. Stablecoins come in a variety of forms that are linked to the asset they are backed by. Since their fundamental value is linked to a fiat currency, fiat-backed stablecoins are perhaps the most widely used kind. Tether (USDT) and USD Coin are two examples (USDC). Users using asset-backed stablecoins often have to put up a real object as collateral, such as gold, silver, or another cryptocurrency, before they may obtain the stablecoins. Many investors find these stablecoins unattractive since they frequently have a centralized structure. One kind of stablecoin is also not backed by any asset at all, which is why they are also referred to as non-collateral stablecoins. By either raising or lowering the number of coins, a computer algorithm will regulate price swings. These stablecoins are frequently given out by nascent blockchain networks as incentives to promote a freshly formed coin.

Taxation of Stablecoins

Stablecoins are generally regarded as an asset across the world, despite the fact that the Canada Revenue Agency (CRA) hasn’t issued any administrative instructions on the subject. In light of this, depending on the nature of the transactions involved, the disposal of stablecoins may be liable to income tax or capital gains tax.

Stablecoin issuance and redemption

In general, when a user purchases stablecoins using fiat currency, this trade shouldn’t be considered a taxable transaction as it is essentially a transfer of fiat currency into electronic currency. In the same vein, stablecoins backed by precious metals should not be taxed when they are issued. However, the price of the stablecoins will depend on the purchasing amount.

Stablecoins that have been redeemed are merely changed back into the fiat currency or tangible goods that served as their backup. Due to the fact that stablecoins often equal a fixed quantity of fiat currency or precious metals due to their stability, there shouldn’t be any gain or loss from such redemption. As a result, redemption often has no tax ramifications. However, there will be a gain or loss depending on how much more or less fiat currency was received than was paid for the stablecoins. If there is a gain, the CRA may classify it as either business income or capital gain. There is no clear-cut standard for how to classify such profits, and each case is decided on the basis of the relevant circumstances. In order to examine the tax implications of the transactions, it is strongly advised that you speak with a knowledgeable crypto tax lawyer in Canada.

Transact in stablecoins and cryptocurrencies

The transaction is typically viewed as a taxable event when you exchange a cryptocurrency like Bitcoin or Ethereum for stablecoins. Again, the specifics of each instance will determine whether the gain is regarded as business income or capital gain. Since there is no gain or loss as a result of the conversion, stablecoins’ stability means that occasionally you can wind up paying no taxes at all. Here is an illustration using the following:

Let’s say you own 1 BTC, for which you paid $25,000 USD. You decide to exchange your 1 BTC for USDT because the market has been so unpredictable (a stablecoin). In light of the fact that 1 BTC’s fair market value on the conversion day was $30,000, you would experience a capital gain or income inclusion of $5,000 ($30,000 – $25,000), making this conversion a taxable event.

Receiving the money in the stablecoin

You must record stablecoin payments as income when they are made in exchange for goods or services, and coin-to-coin exchanges are often taxable activities. Stablecoins can be moved between wallets, although this is not regarded as a taxable event. You should also register the interest you get on stablecoins as income on some cryptocurrency platforms that enable users to do so.

Reporting foreign assets including stablecoins

if you hold specified foreign property with a cost base of $100,000 Canadian or more, which includes all crypto including stablecoins, you have to report your total foreign assets on a form T 1135.  So if you have a foreign rental condo with a cost of $75,000 and bitcoin and USDT with a cost of $35,000 your total foreign portfolio has a cost in excess of $100,000 and you are required to submit a form T 1135. Failure to do that leaves you open to penalties plus interest.

Pro Tax Advice: Maintain a record of your transactions

You must accurately disclose any revenue you get from selling stablecoins, the same as any other crypto, since it might be regarded as either business income or a capital gain. The CRA has made it plain that taxpayers must maintain records of all transactions for up to six years following the end of the most recent tax year to which they apply. As a result, it is advised that a taxpayer make it a practice to periodically export transaction history from trading platforms. Stablecoin profits should be reported, as failing to do so might be seen as tax avoidance, which is illegal and subjects you to criminal tax evasion charges. Fortunately, the CRA’s voluntary disclosure program (VDP) is intended to provide a taxpayer a second chance to fix any mistakes they may have made or to reveal information they may not have previously disclosed. However, the CRA is not compelled to approve all VDP applications, therefore speaking with a knowledgeable Toronto tax lawyer is strongly advised if you want to improve the chances that your change of voluntary disclosure will be accepted.

Frequently Asked Questions

I purchased stable coins, USDT, for $150,000 Canadian. Do I have to report this for Canadian income tax purposes?

The purchase of any crypto, including a stablecoin, does not give rise to a Canadian tax liability. However, if you hold specified foreign property, which includes all crypto including stablecoins, with a cost base of $100,000 Canadian or more, you have to report your total foreign assets on a form T 1135.

I converted my ETH into USDC. Does this give rise to Canadian income tax?

Client to coin exchanges, including into stablecoins, give rise to a taxable transaction. If you made any profit or loss as a result of the conversion you have to report this on your Canadian income tax return.

Disclaimer:

“Only general information is provided in this article. Only as of the publishing date is it current. It hasn’t been updated, therefore it might no longer be relevant. It cannot or ought not to be relied upon because it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. You should contact a lawyer if you have specific legal inquiries.”

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