10 April 2025 External T.I. 2025-1050641E5 - LOSSES ON OBSOLETE CRYPTO INVENTORY

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: FOR CRYPTO-ASSETS PURCHASED FOR SALE THAT HAVE BECOME OBSOLETE AND WORTHLESS 1. GIVEN THEIR CLASSIFICATION AS INVENTORY, CAN THE TAXPAYER WRITE DOWN THE OBSOLETE CRYPTO-ASSETS UNDER SECTION 10 OF THE ACT? 2. IF A WRITE-DOWN OF THE OBSOLETE CRYPTO-ASSETS IS NOT PERMITTED UNDER SUBSECTION 10(1) OF THE ACT, CAN THE TAXPAYER REALIZE A LOSS ON THE OBSOLETE CRYPTO-ASSETS BY "BURNING" THEM, SUCH AS BY TRANSFERRING THEM TO A "BURN ADDRESS"? 3. WHAT ARE EXAMPLES OF DOCUMENTATION THE TAXPAYER SHOULD BE PREPARED TO PROVIDE IN SUPPORT OF A DEDUCTION IN RESPECT OF THE OBSOLETE CRYPTO-ASSETS, EITHER UNDER THE INVENTORY VALUATION RULES IN SECTION 10 OF THE ACT OR AS A RESULT OF "BURNING" THE OBSOLETE CRYPTO-ASSETS

Position: 1. OBSOLETE CRYPTO-ASSETS THAT ARE INVENTORY CAN BE WRITTEN DOWN IN ACCORDANCE WITH THE INVENTORY VALUATION RULES IN SECTION 10 OF THE ACT. 2. YES, PROVIDED THAT "BURNING" THE OBSOLETE CRYPTO-ASSETS RESULTS IN THEM BEING PERMANENTLY REMOVED FROM THE CIRCULATING SUPPLY. 3. SEE COMMENTS.

Reasons: 1. SECTION 10 OF THE ACT. 2. GENERAL APPLICATION OF THE "REALIZATION PRINCIPLE". 3. SEE COMMENTS

XXXXXXXXXX									2025-105064
J. Fung, CPA, CA

April 10, 2025

Dear XXXXXXXXXX:

Re: Losses on obsolete crypto-asset inventory

This letter is in reply to your request sent to us on January 21, 2025 for interpretative assistance regarding claiming a deduction against a taxpayer’s income in respect of crypto-assets purchased for sale that have become obsolete (footnote 1) and worthless.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

In your submission, you made reference to the concept of “burning” for crypto-assets. For the purposes of this letter, we understand “burning” to mean the permanent removal of crypto-assets from a circulating supply. “Burning” may be achieved through various methods depending on the design of a blockchain, such as by transferring crypto-assets to a “burn address” or by calling a “burn” function of a smart contract.

Note that if crypto-assets have only been temporarily removed from the circulating supply (e.g., crypto-assets that are temporarily “locked” by a smart contract), even if they are referred to as having been “burned” (footnote 2) , our comments below with respect to “burning” may not apply.

Unless otherwise noted, all statutory references herein are references to the Act and its accompanying Income Tax Regulations (the “Regulations”).

Facts and Assumptions

1. A taxpayer resident in Canada (the “Taxpayer”) purchased crypto-assets on account of income with the intention of selling them for a profit. The crypto-assets have since become obsolete and decreased in value (the “Obsolete Crypto-assets”).

2. The Taxpayer still holds the Obsolete Crypto-assets in their inventory but considers them to be worthless because the Obsolete Crypto-assets:

• Have no active trading market;
• Cannot be liquidated or sold; and
• Have nil or nominal market value.

3. It is assumed that none of the Obsolete Crypto-assets are a swap agreement, a forward purchase or sale agreement, a forward rate agreement, a futures agreement, an option agreement, or any similar agreement.

4. It is also assumed that the Taxpayer is not a “financial institution” as defined in subsection 142.2(1).

Questions to the Canada Revenue Agency (“CRA”)

1. Given their classification as inventory, can the Taxpayer write down the Obsolete Crypto-assets under section 10?

2. If a write-down of the Obsolete Crypto-assets is not permitted under subsection 10(1), can the Taxpayer realize a loss on the Obsolete Crypto-assets by “burning” them, such as by transferring them to a “burn address”?

3. What are examples of documentation the Taxpayer should be prepared to provide in support of a deduction in respect of the Obsolete Crypto-assets, either under the inventory valuation rules in section 10 or as a result of “burning” the Obsolete Crypto-assets?

Our Comments

CRA response to question 1

Based on the facts and assumptions – and since subsection 10(15) should not apply to deem the Obsolete Crypto-assets to not be inventory of the Taxpayer – the inventory valuation rules in section 10 should apply to the Obsolete Crypto-assets.

Under subsection 10(1) of the Act and section 1801 of the Regulations, in most cases, either of the following two methods of valuing inventory is available:

• Valuation of each item in the inventory at the cost at which it was acquired or its fair market value at the end of the year, whichever is lower; or
• Valuation of the entire inventory at its fair market value at the end of the year.

However, in some cases, specific rules may apply. For example, if the Taxpayer is engaged in an adventure or concern in the nature of trade (footnote 3) , under subsection 10(1.01), the Obsolete Crypto-assets can generally only be valued at the cost at which they were acquired by the Taxpayer. As with non-crypto property, taxpayers should assess whether any such specific rules are applicable to their respective situations. Further guidance on the inventory valuation rules can be found in Interpretation Bulletin IT-473R, Inventory Valuation.

Taxpayers should keep in mind that changes to the fair market values of the Obsolete Crypto-assets in subsequent years may continue to affect the calculation of the Taxpayer’s business income until such time that the Obsolete Crypto-assets are no longer held in the Taxpayer’s inventory.

CRA response to question 2

Based on our understanding of “burning”, if the Obsolete Crypto-assets are transferred to a “burn address” or “burned” through other methods, the Obsolete Crypto-assets can no longer be controlled or used by the Taxpayer or any other person at any future time. Any unrealized loss on the Obsolete Crypto-assets that was not previously included in the calculation of the Taxpayer’s business income would be realized at the time the Obsolete Crypto-assets are “burned”.

CRA response to question 3

Taxpayers have a responsibility to document their activities and transactions in a reasonable manner. In this regard, subsection 230(1) specifically provides that they must keep records and books of account in such form and containing the information necessary to determine the amount of taxes payable under the Act. Pursuant to paragraph 231.1(1)(a), an authorized person of the CRA may inspect, audit or examine the books and records of a taxpayer.

Essentially, the question raised relates to how we will apply the administration and enforcement provisions of the Act, and is not one of interpretation. Whether or not the requirements of the Act with respect to the retention of records will be satisfied, as set out in Information Circular IC78-10R5, Books and Records Retention/Destruction, is dealt with at the Tax Services Office level.

As a general comment, it would be expected that, to support a deduction under the inventory valuation rules in section 10, the Taxpayer must be able to provide evidence of the fair market value of the Obsolete Crypto-assets. Examples of documentation that the taxpayer should consider maintaining in order to demonstrate the nil or nominal fair market value of the Obsolete Crypto-assets are included in the following non-exhaustive list:

• Evidence that trading of the Obsolete Crypto-assets has been suspended on crypto trading platforms and/or the Obsolete Crypto-assets have a nil or nominal trading price (e.g., screenshots from crypto trading platforms); and/or
• Information that the Taxpayer relied on to determine that the project and/or network related to the Obsolete Crypto-assets has failed or been abandoned (e.g., announcements by, or correspondence from, known project team members indicating abandonment; announcements of materially crippling regulatory actions or court orders imposed on the project and / or its team members).

Also, to support that the Taxpayer has “burned” the Obsolete Crypto-assets, the Taxpayer will need to provide the transaction ID or transaction hash of the transaction in which the Obsolete Crypto-assets were “burned”.

The above examples are provided as general guidance and are neither meant to be prescriptive nor exhaustive. Any determination of documentation required should be considered on a case-by-case basis.

We trust our comments will be of assistance.

Yours truly,

Charles Dumas
Section Chief
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 In the context of crypto-assets, obsolescence may be considered to occur if, for example, the project and/or network associated with a crypto-asset is abandoned.

2 For example, this may occur in situations where members of a crypto project team claim that they have “burned” a portion of their crypto holdings but have in fact transferred said crypto-assets to an address under their control, to be retrieved and sold at a later date when the crypto-assets have appreciated in value. This will be a determination of fact.

3 Guidance on identifying an adventure or concern in the nature of trade can be found in Interpretation Bulletin IT-459, Adventure or Concern in the Nature of Trade.