Cryptocurrency mining is the process in which new coins are created on the blockchain. Mining is only applicable to proof of work coins like Bitcoin.
Many Canadians see crypto mining as a lucrative way to earn passive income, and while this is true, there are also a lot of associated costs and taxes to think about. Compared to crypto trading, mining is a lot more complicated when it comes to government regulations and taxes, since there is limited guidance.
In this article, we will explain how the Canadian government treats crypto mining for tax purposes, so that you can determine if crypto mining is right for you.
What is Cryptocurrency Mining?
Cryptocurrency mining involves powerful computers called miners solving mathematical puzzles. The first miner to solve the puzzle wins the right to add the next block of transactions to the blockchain. In return, they receive a reward.
These miners are run by businesses and individuals, and anyone with the right equipment can start mining. Sometimes people will run mining farms, which are large rooms filled with multiple miners.
Is Crypto Mining Legal in Canada?
There are currently no federal or provincial laws regarding crypto mining, but it is legal. The major hurdle is getting the approval of utilities companies to operate miners, since mining is likely to use a significant amount of energy.
The local utility will assess the impact on the electrical grid and there may be discussions around funding and security of the operation.
Any mining operation on First Nations reserve land will mean that federal and First Nations regulations will apply rather than provincial rules.
Any crypto mining that is not a large-scale operation, such as some miners in a person’s own home, will not usually require approval first.
Alberta is one of the top destinations in Canada for crypto mining because of the province’s deregulated electricity and supply of natural gas. Customers can choose between different electricity suppliers to meet their needs, which is beneficial for miners who may get cheaper rates than elsewhere in Canada.
In Alberta, any power plant, including a mining operation, needs approval from the Alberta Utilities Commission unless they meet certain exemptions.
The Electric Utilities Act and the Fair, Efficient and Open Competition Regulation, requires miners to offer any power they produce to the power pool unless they are exempt. There is also further environmental compliance that must be met.
In Quebec, Hydro-Quebec is limiting the power it provides to miners, so the province may not be ideal for large operations.
How to Mine Crypto in Canada
Bitcoin mining in Canada requires specialized ASIC miners often called rigs. It’s not as simple as using your own PC. These mining rigs cost various amounts depending on their power consumption, hash rate, operating temperature and more factors. The more efficient your mining rig, and the lower your electricity, the more profit you are likely to make.
Be wary of buying second-hand equipment because although they may still work, they may not be profitable anymore as technology improves.
These mining rigs will need to be kept cool, away from the sun, and in a secure place. They can consume a lot of energy and may be noisy, so it’s best to keep them away from your main living area.
Once installed, you can connect your miner to a bitcoin mining pool if you wish. A mining pool is a group of miners who come together to mine bitcoin and distribute rewards depending on each miner’s contribution. A mining pool in Canada can offer a steady flow of income to miners who may not have enough power on their own to win the right to add the next block to the chain. The block reward is paid to the pool coordinator who then distributes the rewards to the miners. Those with higher hashrates receive a larger share. Popular bitcoin mining pools include Slush Pool, BTC.com, and F2pool.
Once you have your miner set up, you’ll then want to find a software tool to manage your rig and see how it’s performing. Hive OS and Minerstat are popular tools you can install on your computer to manage your miners.
How is Crypto Mining Taxed in Canada?
Crypto mining can be taxed in two ways in Canada. If you are operating a mining business, for example, a mining farm, then any rewards you receive will be taxed as business income. If you sell or trade your rewards, then that is additionally taxed as capital gains.
If you run a few miners in your own home, then your mining operation would likely be considered a hobby. If you are deemed to mine crypto as a hobby, you are only taxed when you sell or trade your rewards. This is taxed as capital gains tax and your cost basis is zero.
In February, 2022, the Department of Finance introduced draft proposals regarding tax credits and GST/HST related to mining.
The proposals state that the mining payment received as a fee or reward is not considered a “supply” and therefore miners are not required to collect and remit GST/HST. Input tax credits would therefore not be available to the person providing the mining.
There is an exception to this. The rewards is deemed a supply when:
- The other person is not a mining group operator in respect of a group of persons that includes the particular person; and
- The identity of the other person is known to the particular person.
How Much Does it Cost to Mine Crypto in Canada?
Mining crypto in Canada can be costly. Not only are ASIC miners expensive, costing anywhere between $3,000 to $20,000, but you may see increased energy bills.
There are lots of different types of miners and the more powerful yours is the more crypto you will mine, but the more expensive it will be to run. You must factor in the initial cost of the miner and running costs when calculating your profit. Additionally, crypto can go up and down, so when the price of crypto is low, you may not make as much in dollar value. The age of miners is also a factor and your miner may produce fewer rewards over time as new miners tend to be more efficient.
There are alternatives to mining yourself, however. You can buy crypto mining contracts known as cloud mining or have other people run your miners for you known as crypto hosting.
ECOS offers both cloud mining and hosting services. You can buy bitcoin mining contracts which you can tailor to your needs. You can select the hashrate of the mining rig, the length of your contract, and your initial investment. A mining contract allows you to invest in crypto mining without buying any equipment yourself. Everything is taken care of for you and you can login to ECOS to see your rewards. ECOS has a handy calculator on its website to show your potential profits.
ECOS also offers ASIC miners that you can purchase that ECOS will host for you. This means you can own your own mining hardware without the hassle of operating them yourself. This option can return more profits than cloud mining contracts but you may have a larger upfront cost.
With either of these alternatives, be wary of the management costs involved. Read our previous review article on ECOS for more information.
Is it Better to Mine Crypto in Canada or in the United States?
Canada was the first country to launch Bitcoin ETFs and while the US has launched Bitcoin Futures ETFs, there are still no spot bitcoin ETFs. This alone shows how crypto-friendly Canada is compared to the US.
Canada also offers some advantages to miners over the US. Import duties in Canada cost 5% for GST. In the US, levies can add an additional 27% in taxes on ASIC miners imported from China. This is a big difference that can eat into your profits.
While there are no current bitcoin ASIC manufacturers in Canada, that might not be the case for long. A Siacoin ASIC miner manufacturer resides in Toronto and BC and Quebec-based company Blockstream intends to manufacture ASIC miners as well.
Once Canadian companies start manufacturing bitcoin ASIC miners then Canadians will have a much cheaper way to get ahold of ASIC miners further cementing Canada as one of the world’s favourite places for crypto mining.
Crypto Mining can be profitable, but there are various costs you need to consider. Additionally, bitcoin has a “halving” every four years which cuts reward blocks in half, making it more difficult to mine as time goes on. It means that it will potentially cost more to mine bitcoin once this happens, but the price of bitcoin might rise as well, so even though you may receive fewer rewards, they might be worth more. The next halving will happen on May 4, 2024.