I received crypto rewards from Coinbase Earn. Do I file them as other income, or only when I sell them?

As Cryptocurrency is still in its infancy stage, it is hard to understand the tax implications of Crypto activities like Staking, Mining, Swapping, or Investing. I will break down some definitions, and how the Canada Revenue Agency (CRA) sees this from a tax standpoint.

Earning Crypto Rewards from Coinbase

One thing we need to be clear about, is that receiving Crypto rewards from Coinbase Earn is using the strategy of locking up your Cryptocurrency to provide "Liquidity" and participate in the "Proof of Stake" consensus mechanism - which is a way to validate all Cryptocurrency transactions between market participants. By locking up your Crypto and validating transactions, you are being provided a cut (Revenues) of all fees that participants must pay to create a transaction.

Now to make this connection to Crypto Mining - We need to ask, what are the two main, popular mechanisms used by Crypto to validate transactions and maintain security? Proof of Work and Proof of Stake. As most Cryptocurrencies are moving to Proof of Stake, and Bitcoin still operates under Proof of Work, these are one and the same from a tax standpoint. But from an activity standpoint - Proof of Work uses electrical energy and equipment usage to validate transactions, while Proof of Stake uses locked-in Crypto to validate transactions without the need for energy or equipment usage.

My source of information: Coinbase - What is Staking?

Investopedia - Proof of Work

Canada Revenue Agency & Tax Implications of Mining

According to the Canada Revenue Agency (CRA), Crypto Mining is a process that uses something (Like computers or hardware) to confirm Cryptocurrency transactions and validate them on the blockchain network. As we can see now, Proof of Stake and Proof of Work are one-in-the-same from the CRA's viewpoint.

The Canada Revenue Agency sees the income tax treatment for Cryptocurrency miners as different depending on whether your mining activities are a personal activity (hobby) or a business activity. This is decided on a case-by-case basis, and is therefore subjective. But, to clear some air on the definition, if it takes a significant portion of your income, to the point where it can pay a big portion of living expenses, then you must report this as business income. However, If it is considered a hobby, you do not have to report anything.

For more information: Canada Revenue Agency - Cryptocurrency Mining & Tax Implications

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