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In April 2025, the Canada Revenue Agency (CRA) issued an interpretation on losses on obsolete crypto inventory. The interpretation provides an official position of the CRA on the treatment of crypto assets that were purchased by the taxpayer to sell for profit and that have become worthless. This position stems from the general treatment of obsolete inventory pursuant to the Income Tax Act.
What is Obsolete Crypto Inventory?
An asset purchased with the intention of selling it for a profit is classified as inventory. Inventory is considered obsolete and worthless if it meets the following criteria:
- It has no active trading market;
- It cannot be liquidated or sold by the taxpayer; and
- It possesses a nil or nominal market value.
These rules apply to taxpayers who are not financial institutions and to assets that are not option, swap, forward, or futures contracts (i.e. not derivatives).
Where a taxpayer purchased crypto assets as inventory to sell for profit, the crypto assets are inventory and subject to the same rules on obsolete inventory.
Tax Consequences of Obsolete Crypto Inventory
The rules governing the losses on obsolete inventory, including obsolete crypto inventory, involve inventory valuation and the realization principle, which can have significant implications for taxpayers structuring their business income. The CRA recognized two ways to realize the tax effects on obsolete crypto inventory in two ways.
The first way is inventory write-down. Taxpayers have two methods to evaluate the inventory at year-end, either under subsection 10(1) of the Income Tax Act (ITA) or alternatively under section 1801 of the Income Tax Regulations (ITR).
Per subsection 10(1) of the Income Tax Act, taxpayers can valuate each individual inventory at the lower of the cost of the asset or the fair market value of the asset. Generally speaking, cost of an asset is the purchase price of the asset plus all costs reasonably incurred to bring the item to its present condition and location (e.g., shipping, duties, storage). Fair market value is the price the inventory could be sold for in an open market at year-end.
Section 1801 of the Income Tax Regulations offers an alternative to valuate all inventories collectively, rather than each inventory individually. Accordingly, the entire inventory can be valuated at fair market value.
Taxpayers have the option to pick the method, but it has to be consistent.
The second way, available specifically to crypto assets, is realization via "burning". "Burning" refers to the act of sending the crypto assets to a "burn" or "dead" address on the blockchain. This address has no key and thus no one can access and control the crypto stored therein. Therefore, this address is considered as a black hole, graveyard, or dump site, where the crypto that was sent there cannot be retrieved, is lost and out of circulation forever. This act of burning is sometimes done for the purpose of reducing circulation, increasing scarcity, and driving up prices. It is usually performed by the issuer of the crypto assets and hence can be equated to share buyback by corporations.
The CRA accepts "burning" of the crypto assets as a way to realize any unrealized loss on the obsolete crypto inventory that was not previously included in the calculation of the taxpayer's business income.
Exception: Adventure or Concern in the Nature of Trade
There are certain exceptions to the general inventory valuation rules. If a taxpayer is engaged in an adventure or concern in the nature of trade, subsection 10(1.01) of the Income Tax Act dictates that the obsolete crypto assets can generally only be valued at the cost at which they were acquired. Thus, taxpayers should consult with experienced Canadian crypto tax lawyers to correctly characterize whether their crypto activities constitute a business or an adventure of concern in the nature of trade.
Documentation for Compliance
Taxpayers have a responsibility to document their activities to determine taxes payable. To support a deduction under the obsolete inventory rules, a taxpayer should maintain:
- Market evidence: screenshots or data from trading platforms showing suspended trading or nil trading prices.
- Project status: announcements or correspondence from the project teams indicating the network has been abandoned or crippled by legal orders.
- Transaction records: for "burned" assets, the specific transaction ID or transaction hash must be kept.
Pro Tax Tips – Evidence of Obsolescence is Subject to Audit
Inventory valuation and "burning" are subject to a CRA audit and inspection by the CRA. While taxpayers can claim losses for worthless assets, the determination is a question of fact, and failed attempts to prove "burning" (where the assets remain under the taxpayer's control) will result in the denial of the loss. Taxpayers should consult with experienced Canadian crypto tax lawyers and carefully maintain the records of all obsolete crypto inventory to avoid unexpected tax consequences.
FAQ
Can I write down crypto assets every year?
Yes. Changes to fair market values in subsequent years continue to affect the calculation of business income until the assets are no longer held in inventory.
What happens if I "burn" crypto but can still access it?
If a taxpayer claims to have "burned" assets but has actually transferred them to an address under their control to be retrieved later, the CRA does not consider this a permanent removal from the circulating supply. The loss would likely be disallowed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
