Operating with no central authority or bank, Bitcoin is one of many digital currencies (also known as cryptocurrencies) rising in popularity, which makes the related income tax rules even more pertinent than ever. The Canada Revenue Agency (“CRA”) generally considers digital currencies, such as Bitcoin, as commodities for income tax purposes. The relevant income tax implications will vary depending on how the digital currency is used.
Canadian businesses that accept digital currencies as a means to pay for goods or services will be considered by the CRA to be carrying out barter transactions. A barter transaction is essentially a trade of goods or services without the exchange of money. Barter transactions are based on the concept that each person considers the property they receive to be of equal or more value than what they gave up.
When a business receives digital currency as payment, the revenue earned will be deemed to be what the business would have normally charged for the goods or service. For example, a toy store that sells a Rubik’s cube valued at $5 for digital currency would treat the sale as if it had been paid $5.
If the value of the goods or services given up isn’t readily available but the value of the digital currency is determinable, the CRA will generally accept the value of the digital currency as the price of the goods or services sold, assuming that the transaction takes place under normal business circumstances.
The tax consequences from the realization of gains or losses from trading or selling Bitcoins and similar digital currencies like a commodity will depend on whether the transaction is considered on account of capital or income.
Digital currencies that are bought for investment purposes or to produce a form of income will usually result in capital gains or losses. In these situations, only half the resulting capital gain or loss from the transaction is included into income as a taxable capital gain or allowable capital loss. It is important to note that Bitcoins and similar digital currencies are currently not eligible investments for RRSPs, TFSAs and other tax savings plans.
Gains or losses are generally considered to be on account of income when the course of conduct in trading or selling Bitcoins and similar digital currencies resembles a business. In these situations, the entire gain or loss from the transaction would then be treated as ordinary income.
Determining the nature of a transaction (i.e., on account of capital or income) will depend on the specific facts of each situation. The CRA will consider factors such as the frequency of transactions, period of ownership and knowledge of securities markets in making this determination. Since the determination process can be complex, we encourage you contact your Crowe Soberman advisor to assist.
The CRA requires special foreign reporting if the total cost of all your specified foreign properties owned at any time during the year is greater than CAD $100,000. Specified foreign property includes funds or intangible property situated, deposited or held outside Canada, tangible property situated outside Canada, shares of non-resident corporations and other similar foreign assets. However, there are exceptions to specified foreign property such as property used for personal or business purposes.
For foreign reporting requirements, digital currencies are categorized as funds or intangible property. As such, a digital currency situated, deposited or held outside of Canada may be specified foreign property if it is not used or held exclusively for business purposes. A digital currency that qualifies as specified foreign property needs to be reported if the total cost of all your specified foreign properties meets the CAD $100,000 threshold at any time during the year.
The sheer value and popularity of Bitcoins and similar digital currencies have attracted the recent attention of tax authorities. In late 2016, the Internal Revenue Service successfully obtained permission to request the records identifying US taxpayers using the Bitcoin wallet services at Coinbase, Inc. from 2013 to 2015. While the request has been challenged and its scope narrowed, suffice to say, taxpayers need to stay informed about the income tax rules regarding digital currencies as the tax treatment stemming from cryptocurrencies continues to evolve.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Please note that this publication should not be considered a substitute for personalized tax advice related to your particular situation.