Crypto Currency Taxation with Fabio Campanella | E074
Yes, it is taxable.
In today’s episode, Jason is going to talk to Fabio Campanella of the Campanella group. Fabio is a taxation and state planner and is associated with the Capital Group, a professional corporation registered with CPA Ontario.
Episode Highlights:
1.10: Fabio is going to talk about what the realities are when it comes to cryptocurrency transactions.
2.08: Fabio says this is a new asset class, and in essence, it relies on something called blockchain technology, which is a network. It is a network of computers that double-checks each other’s work to ensure that everybody who says they have this currency has it and a transaction has occurred.
3.16: Taxable residents of Canada are taxable on their worldwide income. That means any money that you make anywhere in the world or any transaction that can be measured in Fiat currency and Canadian dollars is potentially a taxable transaction.
4.41: Jason says, the crypto currency that is accepted in the most places are a Bitcoin, which makes it the most relevant to the topic of taxation.
5.13 The next pure tax concept that we are looking at is the concept of business income versus capital gain, says Fabio.
5.20: You are left with two types of classification for income in Canada, and that would be a business type of income or also known as an adventure in the nature of trade, which is essentially taxed at 100% of your marginal tax rate.
6.47 Fabio recommends that if you open up the Income Tax Act, you are not going to find it when you look up Bitcoin. If you look up to cryptocurrency, you are not going to find it; we don’t have specific laws dealing with these types of asset classes yet.
7.10: Fabio explains what they are looking for in a business activity: you are carrying on an activity for commercial reasons. In a commercially viable way, you undertake clear businesslike activities in a businesslike manner that could include preparing business plans and acquiring capital assets or inventory.
8.32: Jason says CRA leaves it open to interpretation based on the actual fact pattern of what happened with the asset in the first place, and there is a couple of presidents around this.
9.14: The interpretation of whether something is a business, or an investment is something that is very commonplace in different places of the law, and it does befuddle some people, says Jason.
10.05: Fabio explains, you buy 100 shares of any Canadian bank stock in a taxable brokerage account. You collect the dividends in, and you reinvest them in a drip. You hold that stop for ten years. You never traded again, and then after 10 years you sell it. You are not a stockbroker. You are not in the securities industry. You are pretty likely to get a capital gains treatment.
11.04: The first thing that people need to understand when it comes to Bitcoin and other cryptocurrencies is that there is actually and putting aside, over counter derivatives.
12.28: From a mining perspective, Fabio doesn’t think any individuals nowadays are truly mining Bitcoin.
13.11: You are providing a service and maintenance of the Ledger in exchange for a possible windfall, which essentially, Jason means it is not guaranteed but nevertheless it is a business, there is no way to make money on unless from some business.
14.23: Fabio says there are a lot of incentives available here like tax incentives, and these are indirect. It is because you want to classify this business income.
15.32: Fabio suggests, if you are going to accept Bitcoin in a transaction, no matter how anonymous the transaction is, it really doesn’t matter if you are going to accept Bitcoin if you are going to accept seashells, if you are going to accept diamonds, what is happening here is the CRA will go to in essence, the barter rules.
17.25: Bitcoin transaction is the same as any other transaction. The issue is because it is not recognized as an actual currency; it is recognized as almost as a commodity under the eyes of tax at the moment.
19.04: If you’re doing something shady, or you are trying to extort people, or you are trying to do a CRA scam that is the currency of choice, says Jason.
19.30: From a speculative standpoint, personal tax liability on Bitcoin is incurred when cryptocurrencies are either sold and realized as currency or exchanged for another cryptocurrency.
23.50: The more knowledge or expertise you have and security for crypto in those sectors, the more the CRA will lean towards business income.
26.19: The more we use financing the more it looks like a business income rather than long-term speculation.
27.15: Fabio says that we don’t necessarily need to be taking Google ads and paid acts in advertising. But you are advertising to the public that you are doing this, and you are looking for other people possibly to put money in order to finance your trades.
28.06: Jason says there are other examples of digital currencies around the world that have worked, not necessarily Bitcoin.
31.44: Fabio recommends going through the checklist, and then you have to make the determination along with competent somebody. You know you’re primarily it’s going to be an accountant if it’s a huge transaction, it could be attacked, specialist accounting or tax specialist lawyer, but that is the methodology that this CRA is going to utilize. And that is what people who trade in big points utilize as well.
32.57: The thing about Bitcoin is there is an immutable Ledger showing every transaction.
3 Key Points:
Fabio explains how the CRA looks at your transactions regarding business income or capital gains?
Fabio talks about the buying and selling of cryptocurrency from an investment or speculative standpoint.
At any given second, you can really get a quote in Canadian dollars on Bitcoin. Fabio explains if somebody pays me for my service in Bitcoin or buys a product from you. In Bitcoin, that transaction will simply be measured in the equivalent Canadian dollars.
Tweetable Quotes:
“Business losses are 100% deductible at the margin, whereas capital losses are only half deductible, but only against capital gains.” – Fabio
“We established that if you want to have a game, you are going to want it as the capital game.” – Fabio
“Everybody knows page stocks, and that fact pattern can switch over to Bitcoin. It can switch over to anything real, estate, anything really, but that’s just the basics.” – Fabio
Theoretically, when you mine in cryptocurrency when you mine Bitcoin, you have this supercomputer, and it is verifying crazy mathematical transact problems, and you are rewarded for doing this work.” - Fabio
Resources Mentioned
Facebook – Jason Pereira’s Facebook
LinkedIn – Jason Pereira’s LinkedIn
Woodgate.com – Sponsor
LinkedIn – Jason Pereira’s LinkedIn
Fabio: LinkedIn
Transcript:
Producer: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different expert, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now your host, Jason Pereira.
Jason Pereira: Hello and welcome. Today the show I brought Fabio Campanella, the founding partner of Campanella Group to talk about an interesting and timely topic, and that is the taxation of cryptocurrencies. So I'm sure that, like many, you've heard about cryptocurrencies from the standpoint of not paying taxes. Well, we're going to go over that and talk about just how salient that wisdom is and how much trouble you'll be in if you believe that. So with that, here's my interview with Fabio.
Jason Pereira: Fabio, thanks for coming on.
Fabio Campanella: Amen. Thanks for having me.
Jason Pereira: My pleasure. So Fabio Campanella of the Campanella Group, tell us about what it is you do.
Fabio Campanella: Sure. It's primarily, I'm a tax and estate planner, and I run through something called the Campanella Group, which is a professional corporation registered with CPA, Ontario. That's pretty much sums it up. We don't need to get into too, too much detail, I don't want to bore your listeners.
Jason Pereira: Fair enough. So you reached out about various topics and the one that really resonated was this one around cryptocurrencies and taxation. So before I jump into that, if you want any information on how cryptocurrencies work, my other podcast, FinTech Impact has covered this many times, but one of the things that a lot of people talk about, and I'll never forget this. I remember the news was covering it the first time when this cafe in Toronto was taking Bitcoin, he made the statement of, "Yeah, and this is great, cause I don't have to pay tax on it." And there's the semblance or the belief that the anonymity factor of all this means that, "Oh yeah, I can just get away from not paying taxes on this." I brought you on to talk about the realities. So talk to me about what the realities are when it comes to cryptocurrency transactions.
Fabio Campanella: Okay. So crypto currency, I mean, I'm assuming that your listeners are educated in this. This is a new asset class and in essence, it relies on something called blockchain technology, which is a network, and I might be butchering this, but it's a network of computers that double checks each other's work to ensure that everybody who says they have this particular currency has it, and a transaction has occurred. In essence, cryptocurrency, there's been a huge misunderstanding because they're essentially anonymous when you own cryptocurrencies, especially Bitcoin.
Jason Pereira: Let's start from that. You're basically, the only thing that is on the record, because this is an open ledger anyone can read, right?
Fabio Campanella: Right.
Jason Pereira: Is an address. So there is an nothing on the chain that links your address to you as a human being or a business. So that's where the anonymity factor comes in.
Fabio Campanella: Correct, correct. So there's been a misconception that, "Okay, because you're anonymous, you yourself are anonymous, that these transactions do not attract tax." Let's go straight to the basics of taxation in Canada. Any resident of Canada, any taxable resident, and there's specific definitions of that, but if you live in Canada you're a taxable resident of Canada. So taxable residents of Canada are taxable on their
worldwide income. That means any money that you make anywhere in the world or any transaction that can be measured in Fiat currency, in Canadian dollars, is potentially a taxable transaction.
Fabio Campanella: So right off the bat, by definition, cryptocurrency transactions, if there is a gain component to them, should trigger some form of taxation. And that's the legal basis upon which the government of Canada will tax you on. So once we've kind of got that set aside, like you are your Bitcoin transactions, your cryptocurrency transactions are taxable.
Fabio Campanella: I'm going to get into sort of the details more surrounding Bitcoin than the other thousand cryptocurrency transactions. Mainly because Bitcoin is, it's so big. It's pretty much the most popular one. I think, you'll know this better than me, but I think that the market cap of Bitcoin, as it stands right now in Canadian dollars should be about what a trillion?
Jason Pereira: Well you're looking at about 896 billion as of right this minute US dollars. So yeah, that's going to be well over a trillion dollars. And more so, I think, one of the bigger issues, or one of the bigger reasons we need to focus on that, is the network effects, right? So it's nice that [inaudible 00:04:30] a more crypto tokens than are than we can count out there. But the reality is what the reason why currencies accept it is valuable is because it's accepted everywhere. So the cryptocurrency that is accepted in the most places is Bitcoin, which makes it the most relevant to the topic of taxation.
Fabio Campanella: Exactly. Exactly. So from that particular perspective, the idea is this is no joke. And my personal belief is those who deny it or say it's some sort of crazy bubble, I think that they're missing the point. This is here and I think it's something that we need to pay attention to. And the taxation of it is going to be a big secondary factor.
Fabio Campanella: So from that particular perspective, the next pure tax concept that we're looking at is the concept of business income versus capital gain. So Bitcoin, you are not just pure Bitcoin, you're never going to get a dividend from it. It's not going to pay you a dividend because it's not a company. It's not going to pay you a rent. It's not going to pay you a royalty, right? So you're left with two types of classification for income in Canada. And that would be a business type of income, or also known as an adventure in the nature of trade, which is essentially taxed at 100% of your marginal tax rate. Or, you're looking at a capital gain, which under current legislation is taxed at half, is half taxable.
Jason Pereira: For now, as we head into an election, but [crosstalk 00:05:55].
Fabio Campanella: For now. Yeah, we'll see. We'll see. Right?
Fabio Campanella: And then on the flip side, business losses are 100% deductible at the margin. Whereas capital losses are only half deductible, but only against capital gains. So you clearly see that there's going to be a preference if there's a gain for the taxpayer to report Bitcoin transactions as capital gain, because they're paying half the tax. And there's going to clearly be an incentive for someone who takes a big dive or a big dump in Bitcoin to claim that loss as a business loss, because you can utilize it against all forms of personal income and it's a hundred percent write off at the loss level. Okay?
Fabio Campanella: The question now is how does the CRA going to look at this? How is the CRA going to look at these transactions? And this is where the issues lie because there are no, if you open up the Income Tax Act and you look up Bitcoin, you're not going to find it. If you look up cryptocurrency, you're not going to find it. We don't have specific laws dealing with these types of asset classes yet. So right now you're looking at going to essentially guidance. CRA guidance. It's not really court cases because there isn't really any, there aren't really any precedents at any high levels of court on this. However the CRA does provide some guidance.
Fabio Campanella: So we established capital gain versus business income. We established that if you want to have a, if you have a gain, you're going to want it as a capital gain. If you have a loss, there's an incentive to claim it as a business loss. And that is pure numbers, right? Gain, you want to take half the tax loss, you want to take the whole thing, it just works out better.
Fabio Campanella: So how does the CRA look at your transaction when it comes to business income or capital gain? And commonly, what they're looking for for business activity is that you're carrying on an activity for commercial reasons and in a commercially viable way. You undertake sort of businesslike activities in a businesslike manner, that could be including preparing business plans, acquiring capital assets or inventory; you're promoting a product or services or service; you're showing that you intend to make a profit, even if it's unlikely to do so in the short term. These are all sort of things that the CRA is looking at before they sort of make a determination of whether things are business income or capital gain.
Fabio Campanella: I'll give you a quick example.
Jason Pereira: So this is an interesting point to stop on it because people may think that this is unique to crypto. Like, "That's not a fair. Wait a sec. It's got to be one thing or the other," right? Like "What's going on?" But in actuality, CRA leaves it open to interpretation based on the actual fact pattern of what happened with the asset in the first place. And there's a couple of precedents around this. So for example, trading within a TFSA, most people will be like, "No, no. That's tax sheltered because it's tax free." Well, if you're actively trading in there and make a bundle of money, they're just going to be like, "No, no. This is a speculative trading business. This is not actually your long term savings account," and basically fully tax that, right? They'll it even, in your personal life, if you basically, I've spoken to people like this who basically, who built like quantitative models for trading. And they're like, "I'm not even going to try to claim this as capital gains or capital losses, because at the end of the day, CRA is going to know this as a business," right?
Jason Pereira: So the interpretation of something's a business or an investment is something that's very commonplace in different places of the law and it does befuddle some people.
Fabio Campanella: And what you stated at the beginning of your point there it's based on the fact pattern is the key. It's based on the individual fact pattern for that particular individual. So it's not exactly like you said, it's not based on the asset, it's on the fact patterns surrounding the disposition of the asset.
Fabio Campanella: Simple, simple, simple example. You buy a hundred shares of any Canadian bank stock in a taxable brokerage account. You collect the dividends and you reinvest them in a drip. You hold that stock for 10 years. You never trade it again. And then after 10 years you sell it. You're not a stock broker. You're not in the securities industry. You're pretty likely to get a capital gain treatment. [crosstalk 00:10:02] Yeah, you're cut and dry.
Fabio Campanella: But even if you're not a stock broker, even if you're not an investment advisor, and you're not in the securities industry, but you bought let's say a hundred shares of TD Bank and you're actively monitoring the price of TD every single day. And you're trading in it every single day. You're going, you're looking at trade volumes, you're looking at this, you're doing some technical analysis and you buy it, sell it, buy it, sell it, buy it, sell it. And you're making consistent money over the years doing this, that fact pattern looks more like you're running a side business then you're doing a sort of a passive investment cause you clearly don't care about the dividend. You're clearly playing with the price and you're clearly doing it frequently.
Fabio Campanella: So these are kind of extreme examples, utilizing a traditional investment, a bank stock, everybody knows bank stocks, and that fact pattern can switch over to Bitcoin. It can it over to anything. Real estate, anything really. But that's just the basics.
Fabio Campanella: The first thing that people need to understand when it comes to Bitcoin and other cryptocurrencies, there's actually, and putting aside let's say over the counter derivatives which theoretically are possible, there's actually three types of broad transactions that I believe you can get into, and you might want to add a couple more cause you're actually quite knowledgeable on cryptocurrency. You know, more about it than I do, that's for sure.
Fabio Campanella: What I've identified is there's mining of Bitcoin. There's using Bitcoin or other cryptocurrencies in actual market transactions, buying and selling things with Bitcoin. And then there's buying and selling crypto currency from an investment or a speculative standpoint. That's what I've identified. Do you have anything else that would be common, other than crazy things like, somebody writing a derivative?
Jason Pereira: Mining, transaction, and then what was the last one you had there?
Fabio Campanella: Just buying and selling from a speculative or an investment perspective.
Jason Pereira: Yeah, I think it comes down to it's a current, I think that's basically it. You have creation, you have use, you have speculation and you have use. I think each of those speaks to one of two different scenarios quite, which I'll let you get to in a second, quite easily. I mean there are, yeah, there are other functions for it in particular around against derivatives. There's other ancillary things around it. But as for the actual cryptocurrency itself, those are pretty much the three primary use cases.
Fabio Campanella: Yeah. Perfect. So from a mining perspective, I don't think any individuals nowadays are truly mining Bitcoin. I think it's all done in data centers, if I.
Jason Pereira: [crosstalk 00:12:34] All I know is it's not profitable. I mean, good luck to you, but.
Fabio Campanella: Exactly, exactly. So let's say theoretically when you mine a cryptocurrency, when you mine Bitcoin. You have this super computer and it's verifying crazy mathematical problems and you are rewarded for doing this work or for your computer doing this work with that particular cryptocurrency, with Bitcoin. Okay? That reward, and what you've done here, I mean, without even getting into details, it's clearly a business.
Jason Pereira: Mm-hmm (affirmative).
Fabio Campanella: You're clearly in this and you're running a business. This is not, that is not [crosstalk 00:13:10].
Jason Pereira: [inaudible 00:13:10]. I mean like you're providing this service and a maintenance of the ledger in exchange for possible windfall, which essentially, I mean, it's not guaranteed, but nevertheless yes, it's totally, there's no, there's hardly, it's a business. There's no way to make money on it unless it's a business.
Fabio Campanella: Exactly. So you're checking all the boxes. Don't even try to claim that as capital gain, don't even try. And there are tax planning opportunities around this, is if if it's business income and it's active business income, then theoretically you could incorporate a company, buy the computers and whatnot and capitalize them in the corporation, in the CCPC, the Canadian Control Private Company. And you could actually achieve a very low tax rate in the corporation because of the small business deduction, right? So in Ontario would be about to 12.2% and you could reinvest in some new computer equipment and so on and so forth. So there's actually quite a bit of tax planning around that.
Jason Pereira: Here's the other one people don't realize, which is I'm not pleased with, but there are different hydro rates, electricity is what like to call hydro in Ontario for some stupid reason. There are different rates for manufacturers. And it is possible for mining companies to actually qualify for those rates, which I do not like, but continue.
Fabio Campanella: Yeah. Yeah. I mean, and that's the thing. So there's a lot of incentives available here, tax incentives, and these are indirect. Right? It's because a, you want to classify it as business income? Sure. No problem. I'm going to throw it all into a corporation, get the small business deduction and get a huge tax deferral, and there's all kinds of tricks we can use that are completely legal and completely established to grow the business. But the idea though is that it's business income. But how do you measure that business income? And it looks like when you're rewarded with the Bitcoin, whatever the conversion rate to Fiat or to the measurement that we like to use in Canada, the Canadian dollar, on that date, that's the income. So if you're given one Bitcoin and Bitcoin is worth 50 grand at close a business that day, that is your income. Business income. 50 grand. Okay? Makes sense?
Jason Pereira: I hear you. No, I absolutely hear you.
Fabio Campanella: Yep. The next thing is, and this one's actually a little bit strange, but it's using cryptocurrency, using Bitcoin in purchasing sale transactions. So you mentioned that cafe, or was the cafe that was accepting Bitcoin that you were mentioned at the beginning?
Jason Pereira: In that case it was a cafe. Yeah. I don't know if they're still doing it.
Fabio Campanella: Right. So if you're going to accept Bitcoin in a transaction, clearly, whether no matter how anonymous the transaction is, it really doesn't matter. If you're going to accept Bitcoin, if you're going to accept seashells, if you're going to accept diamonds, what's happened here is the CRA will go to, in essence, the barter rules, right? So let's say that I, as an accountant, barter with a landscaper, okay? And I say, "Okay, look, I'm going to do your year end. I'm going to prepare your corporate year end. I'm going to prepare your corporate tax. So on and so forth. Let's say that's 2,500 to 3,500 bucks. And in exchange, you're going to shovel my driveway and mow my lawn." Okay?
Jason Pereira: Mm-hmm (affirmative)
Fabio Campanella: No money has exchanged hands. All right? No one will ever probably really find out about it. But the reality is you've entered into a barter transaction, which can be measured financially in Canadian dollars. And that's subject to both HST and tax, okay? And what happens here is you measure the most measurable transaction, which let's say the year long service that the landscaper is going to provide, it's pretty clear that's worth 2,500 bucks to 3,500 bucks. Okay, three grand. The CR is going to say, give me [inaudible 00:16:44]. Put $3,000 on your income tax return as business income, and you owe us 13% HST, and there will be a corresponding right off to the other individual, if it is a deductible expense, and an HRC input tax credit on their side, okay? So it's treated as a barter transaction.
Fabio Campanella: So Bitcoin, at any given second you can really get a quote in Canadian dollars on Bitcoin. So if somebody pays me for my service in Bitcoin, or buys a product from me in Bitcoin, that transaction will simply be measured in the equivalent Canadian dollars. Okay?
Jason Pereira: I mean, in fairness, that's largely the same for any currency transaction.
Fabio Campanella: Exactly the same as any other transaction. The issue is because it's not recognized as an actual currency, it's recognized as almost like a commodity under the eyes of tax, at the moment. So they're looking at it like, "Hey, you're paying with gold nuggets," in essence. So what are those gold nuggets worth right now at the time of the transaction? You've bartered a product, gold, for a service or another product. And those are the guidelines that they are using.
Fabio Campanella: So I guess those are the two we have to cover those. But I think that most people, they're more worried about speculation cause the vast majority of people [crosstalk 00:18:03]
Jason Pereira: I mean, yeah. I mean, here's the thing. As much as we use the term currency, I mean even guests on some other podcasts like, "Well, why would you use it for transactions?" Like it's, you know, very few cases are actually using it for transactions more are using for speculation, absolutely. So that's where most of the use case falls. So this is this falling piece is where most people will have to pay attention closely.
Fabio Campanella: Yeah. And, from a transaction standpoint, likely you, you'll probably confirm this for me, but probably it's more used in transactions for let's call it shady purposes.
Jason Pereira: I mean, that's the general synopsis and that's like, that's the incentivized reason. But I've seen it used in a lot of other things, specifically people doing work, like highly skilled engineers, for example, doing work outside of their currency regime is highly questionable. So instead of getting paid in US dollars, which there's friction costs and whatnot, do they get [inaudible 00:18:56] get paid in Bitcoin? There's a number. I mean, you can buy a Tesla now with Bitcoin. But well they actually stop doing that, but is going to turn it back on. Point is, is that yeah, there's absolutely. If you're doing something shady or you're trying to extort people or you're trying to do a CRA scam, that is the currency of choice.
Fabio Campanella: Yeah. Yeah, yeah, for sure. But once again, for most people that are listening to this, they're going to be talk, they're going to be taking Bitcoin or cryptocurrency from an investment perspective, a speculative perspective. I want to buy loads [crosstalk 00:19:22].
Jason Pereira: Yeah. Let's just use the word speculative, please. I mean, there's a huge difference between [inaudible 00:19:24] and speculation and, continue.
Fabio Campanella: Yeah, exactly. Let's say from a speculative perspective, right? So from a speculative standpoint, personal tax liability on Bitcoin, it's incurred when cryptocurrencies either sold and realized as Fiat currency or exchanged for another cryptocurrency. Okay? That is the trigger point at which you have either a gain or a loss for tax purposes. Okay? So if you're speculating, right? Like I talked about before, the tax liability is either on account of business income or capital gain. If the trading activity, or the volume of trades, are very frequent, the CRA is probably going to look towards business income as opposed to capital gain.
Fabio Campanella: But it's not that simple, to be honest with you. So if you look at the CRA's guidance on this, they don't really have specific guidance yet, and they're going to defer to IT Bulletin 5-479R, which is transactions and securities. Even though this is clearly not a security, okay? It's clearly not. At the moment, that to what they're looking at. So for anybody who's familiar with that, and a lot of people are actually familiar with it. There's a whole list of items or checks and balances that the CRA is going to look at before they make that determination. And once again, it's based on the individual fact pattern. So that individual's fact pattern. It's case by case. It's not legislated rules.
Fabio Campanella: The most obvious one is going to be the frequency of transactions, right? So if the taxpayer's displaying like this extensive history of buying and selling of securities, or let's replace the word securities with Bitcoin, there's a quick turnover of the asset over and over again, that's going to be more indicative of a business transaction than a capital transaction. Within the frequency of transactions area, they're also going to look at the volume of trades. So frequency it's like, "Okay, I made one trade a day." That's actually quite frequent. But there's also volume of trades. Like one of my clients during, I think it was 2018 when crypto got busted down, this poor guy lost a million dollars and his volume of trades when he downloaded them and sent them to me to prepare his tax return, there was 10,000 trades in one year, right? 10,000.
Jason Pereira: I mean, I just pictured that from a capital gains situation. Like here's the trouble. Now let's just go to superficial loss rules now.
Fabio Campanella: Yeah.
Jason Pereira: You know, at the end of the day, odds are he didn't stop trading for a 30 day period, but superficial loss rules. I mean, he should be thankful that in Canada it's that easy because in the US with the wash rules, and there was a case of this with someone trading on Robinhood, the reality is that whatever losses they had, they only get credit for it next year. And they owed the taxes this year. It's brutal.
Fabio Campanella: Well with this particular individual, there were so many trades. I sat there and I looked at them I'm like, "Buddy, I'm not going to calculate of these trades. This is crazy." I go, "What did you put in? And what did you take out?" And it turned out that he lost a million dollars. Somewhere around a million dollars. It was in a year that he had a large capital gain elsewhere. So he kind of said, the determination was like, look taking this as a business loss is a pretty aggressive stance, even though it probably should be, right?
Jason Pereira: Mm-hmm (affirmative)
Fabio Campanella: So it was kind of like an offset and Bob's your uncle, like it offset against the gain, and he didn't want to get greedy and try to take a full million dollar loss.
Fabio Campanella: However, I think that knowing the rules now, I think that ultimately it probably should have been a business type of loss cause he was clearly running a business in terms of frequency of trading in terms of volume of trading. And then you'll see some other points on the checklist that this individual also hit. Okay?
Fabio Campanella: So that would be the frequency of transactions. That's the first criteria.
Fabio Campanella: The second would be the period of ownership. And that's how are you holding onto your positions? And that's in general with securities. So securities of crypto held for very short periods of time that supports income treatment more than a position held for the long haul. And that's pretty logical. I don't think we even really need to cover more of that.
Fabio Campanella: The next point would be the knowledge, they state the knowledge of the securities market. And once again, let's replace the word securities with Bitcoin or cryptocurrency. The more knowledge your expertise you have in securities or crypto in those sectors, the more the CRA is going to lean towards business income. So you are like, for you, for example, you have a lot of knowledge of securities. You have a lot of know of crypto. You're out there. You're doing podcasts. You're unknown content expert on these things.
Jason Pereira: Yep.
Fabio Campanella: That's going to be a more of a tick towards business income. But you know, some Joe Blow who doesn't know anything about this stuff and his barber's like, "Hey yeah, I put 10 grand to crypto," and they worked some blue collar job and they've they don't even know what a security is, that's going to be more along the capital gains side, all [inaudible 00:24:28].
Fabio Campanella: The next thing they're going to look at is, do securities or Bitcoin or cryptocurrency transactions form a part of the taxpayers ordinary business? So for example, if securities are Bitcoin transactions form a normal part of your primary business, the CRA's going to lean more towards business income. So are you registered with IIROC? That's a tick against you. Are you mining Bitcoin, for example, or mining crypto, multiple cryptocurrencies, and then getting rewarded with them and dumping them? That forms a part of your business. Are you just trading Bitcoin? Even if you're not trading frequently, maybe once week, but you're really, really good at it for whatever reason, and you're basically living off the spoils of that, that forms a part of your ordinary business. So that's what they're looking at there.
Fabio Campanella: The next criteria, and there are four more, is time spent. And this one's hard to kind of prove. But if a substantial amount of time is spent studying the crypto market, trading in the crypto market, working in the crypto market, the CRA's going to lean more towards business income. That's kind of hard to prove, cause they're not going to go to your office or your house, but they can look at it through the amount of time logged in on trading platforms or whatever it is.
Fabio Campanella: The next one's interesting. It's financing. As an investor, are they trading with their own money? Like just savings? Okay? Are they using some sort of a margin account? Which I suppose is possible now because Bitcoin trade, you can get them on ETFs, right?
Jason Pereira: Well, not only that, I mean there are, I've interviewed them, they're crypto lending platforms that will let you...
Fabio Campanella: Right. There you go.
Jason Pereira: Exactly.
Fabio Campanella: Yeah. So are you using some form of financing and if you are, how complex is that financing? So the more you're using financing, the more it looks like a business income rather than just straight up speculation, long term speculation.
Fabio Campanella: Next thing that comes into play is something they call advertising. So is the taxpayer advertising or otherwise making it known that he or she is willing to purchase securities or cryptocurrencies or trade in them.
Jason Pereira: They're on TikTok advertising all their crypto [crosstalk 00:26:43].
Fabio Campanella: You got it.
Jason Pereira: Okay. So there you go. Social media's got a cost. Anyway.
Fabio Campanella: Yes. Yes. And, and I'll talk to another point on that. I actually wrote an article years ago for the Financial Post on that, how social media is used by the CRA. But if you're advertising it, they consider social media posts, especially frequent social media posts, to be a form of advertising. So you're advertising your crypto trades, you're trying to build an email list, and you're offering a crypto trading guide, whatever it is. This is all advertising. You don't necessarily need to be taking Google ads and paid ads, but you are advertising to the public that you are doing this, and you're looking for other people possibly to put money in or to finance your trades.
Fabio Campanella: And then in the case of shares specifically, it's their nature. So speculative types of non-dividend paying shares would be more business like. That doesn't really, they mention this, the CRA, but that doesn't really hold any weight in crypto in my opinion. So I think that they would, that one wouldn't really come into play because from the perspective of Bitcoin, they're going to just say it's speculative in the first place, because it's not a Fiat currency, it's not recognized by anyone other than El Salvador, now?
Jason Pereira: It is, yes. El Salvador has made it an official currency. So we'll see how that goes.
Fabio Campanella: So, I mean, it's... [crosstalk 00:28:01]
Jason Pereira: Here's the thing. Yes, fair enough. Well, you know what you say that, but there's other examples of digital currencies around the world that have worked not necessarily Bitcoin, but the [inaudible 00:28:11] for example, in... and M-Pesa in Kenya, which has been a highly effective mobile based currency transfer service for a long time. So, it's not a crypto currency, but it has been a valuable tool for moving money around digitally, more of a traditional form of currency. But nevertheless, a lot of the utilities around crypto there, anyway, I'm sure people will debate me on this, but nevertheless, the use case is very similar.
Fabio Campanella: Yeah. And look, it's all got to start somewhere. I heard about Bitcoin, what was it, 10, 11 years ago, whenever it first came out? I'm like, "What the hell is this?" Right? Like "What heck are people talking about? It's one of these stupid Facebook memes or whatever," you know? But now it's a thing and we've got to learn how to deal with it.
Fabio Campanella: So those are the, those are the broad points the CRA is going to be looking at when making their decision. And remember in taxation in Canada, generally speaking, the onus is primarily on the taxpayer. The onus is on the taxpayer to correctly report their income. And if the CRA throws a position against you, you've got to kind of prove them wrong.
Jason Pereira: That is absolutely true. It's the incongruity of it all is we can't make accusations of them necessarily.
Fabio Campanella: Exactly, exactly. So from that, none of these points, none of them are kind of like a silver bullet that's going to say, "Okay, well you traded frequently, therefore, 100% is business income." I want people to understand that none of these things are truly a silver bullet. It's the collection of these things. You could be a frequent trader, but have zero knowledge of the industry, you're not advertising, you're just making a bunch of trades, and you could still have the argument that, "Hey, I'm making a bunch of trades cause I'm bored at work and there's nothing to do. And I'm trading it on my, whatever on my, on my phone. And I happened to be in a time where the whole damn market just went up and I pulled out and I made a hundred grand." Not necessarily a business income just because you made frequent trades.
Fabio Campanella: So, I mean, I'll give you a couple examples that are just extreme, but just to see how the fact patterns fit, right? So like whatever Sally, she buys and sells Bitcoin every day, she studies a market, she pays close attention to trade volume on a daily basis, she's always getting positive returns on her investment, she's always on social media, multiple times a day, with her thoughts on where Bitcoin is going. She's also an investment advisor. She regularly trades Bitcoin through ETFs and other commodities let's say on client accounts. She trades using money borrowed on a home equity line of credit. She rarely holds her position for longer than a day or two. Okay? That's pretty clear cut business income. She's ticking all the boxes. She's advertising, she's frequently trading, she has lots of knowledge of the industry, she's using borrowed money to do the trades, she has a high volume of trades. She's ticking all the box. I'd be hard pressed, as her accountant, to report this as a capital gain.
Fabio Campanella: On the flip side, you know, you got Bob, he bought one Bitcoin in 2019, paid, I don't know, 12 grand for it, I think that's what it was. He held onto the investment. Didn't pay attention to the market. Kind of forgot that he owned it. 2021, I don't know, he got laid off, lost his job. He's a factory worker. Ran into financial difficulty. He noticed Bitcoin was trading at whatever 50 grand, okay? he sold the coin, took the money, lived off that money for a while until he got a new job. He never invested in anything else in his life, uses personal savings to make the original purchase. He doesn't use social media. He spent no time researching the investment. It's clearly in my mind, a capital gain. He's checking all the balances for a capital gain on this one.
Fabio Campanella: So those two extreme examples. But what you have to do is you have to go through the checklist and then you have to make the determination along with somebody who's competent. Primarily it's going to be an accountant. If it's a huge transaction, it could be a tax specialist accountant or a tax specialist lawyer. But that's the methodology that the CRA is going to utilize and that's what people who trade in Bitcoin should utilize as well, in my opinion.
Jason Pereira: So a lot to digest there, but you've gone through all the points in terms of the factors that are involved in determining this. Anything else to add?
Fabio Campanella: I think that's the major points that I wanted to make. Right? I just wanted to provide clarity on the guidance and I gave you the IT bulletin that the CRA utilizes for this, I think it was 140, yeah, IT-479R. So people who really want to get details can take a look at that. That'll give them even more, more detail.
Jason Pereira: And I'm going to answer one of the questions that hasn't come up, which absolutely would. The anonymity aspect, right? People will often talk about this. Well, how're they going to find me? The reality is it's known, well Bitcoin is known in various circles of authority or specifically prosecutionary authority as prosecution futures. The thing about is there is an immutable ledger showing every transaction. They may not know that that wallet is yours, but if at some point there is an indication to that wallet being yours specifically, usually when that money has to reenter the normal Fiat system, they gotcha.
Jason Pereira: So the reality is, and if you think they're not going to throw artificial intelligence at this problem and a lot of data out of it, you're certainly mistaken cause there's too much at stake. But the reality is that despite the anonymity it provides within the network, when you leave the network and you try to go back into the real world, there is a weakness point there. And that's partially, I believe, what happened with that entire hack in the US pipeline system, was they caught people and they recovered some of the money because there was some point of reentry where they can identify it. But anyway, that's besides the point.
Jason Pereira: So overall, bottom line is sort of ruin everybody's parade, yes, you do have to pay for it, pay taxes on it. And you know what, if you want to try to play games with this, like anything else, it's caveat emptor. If they catch you, it's not going to be pleasant.
Fabio Campanella: Yeah. It's, it's really not going to be pleasant. To be honest with you, it's going to be punitive in my opinion, if they catch you and it's material to them. And listen, they have a multitude of ways, old fashion and new fashioned ways to catch you. I'm by no means an engineer or computer software engineer or anything like that. But they're clearly employing computer techniques, AI, to figure things out. But there's also old fashioned ways. Like, look, people are out there advertising their trades, talking about big Bitcoin trades or this, that, and the other all over social media. Look, CRA's got what, a hundred, a hundred fifty thousand employees? I don't know. They've got a ton of people. One of these people is going to be connected directly or indirectly to you on social media. They're going to see your posts. And, the CRA has blatantly said that they will use social media to help them find tax cheats and to form network values on people. It's an indirect form of income verification. Right?
Jason Pereira: Absolutely.
Fabio Campanella: So that's [crosstalk 00:34:57].
Jason Pereira: Going to say, that's fair because that's fair.
Fabio Campanella: It's fair, yes.
Jason Pereira: Why it's also fair is let's think of all the cash businesses out there. Plenty of cases that they've dealt with where someone's like, "Oh, I only made 20,000 a year for the last 10 years." It's like, "That's interesting. You live in a $4 million house and you drive a Ferrari."
Fabio Campanella: Yeah.
Jason Pereira: Proof of lifestyle, proof of income. So, you know...
Fabio Campanella: You're going to Bermuda for three times a year, but you're claiming $30,000 a year of income, but your Instagram is showing you like jet setting at casinos, this, that, and the other, well, how did you get into these places?
Jason Pereira: And the only have to get you once, cause once they get you once, they're going to crawl up your butt every year thereafter. So good luck to you with that.
Fabio Campanella: Yeah.
Jason Pereira: Anyway, that was quite the information session. I'm glad we dispelled this myth and anyone who's a business owner who's looking at taking crypto currencies as a revenue source, as a possible transaction, as a form of payment, be aware of these things. Be very aware of these things and do not assume that you can get away with them because you will pay a price one day. Can't say when can't say for sure but you are obligated. So just know that.
Jason Pereira: So thank you so much for your time, Fabio. Seriously appreciate it. Where can people find you?
Fabio Campanella: Website is coming up. It's going to be Campanellagroup.com. If people want to get in touch with me, it's my first name fabio@campanellagroup.com.
Jason Pereira: Excellent. Thanks.
Fabio Campanella: Yep. Thank you for having me.
Jason Pereira: Absolute pleasure.
Jason Pereira: As I'll always thank you for joining us and I hope you enjoyed that podcast. And as always, if you enjoyed this podcast, please leave a review on Apple podcast, Stitcher, SoundCloud or Spotify wherever you're podcast. Take care until next time.
Producer: This podcast was brought to you by Woodgate Financial, an award-winning financial planning firm, catering to high net worth individuals, business owners, and their families. To learn more, go to woodgate.com.
Producer: You could subscribe to this podcast on Apple podcast, Stitcher, Google Play, and Spotify, or find more episodes at jasonpereira.ca. You can even ask Siri, Alexa or Google Home to subscribe for you.