Canada Revenue Agency Tax Treatment of Bitcoins and Other Cryptocurrencies
Bitcoin The Cryptocurrency Climate in Canada
Over the past couple of years, Bitcoin and other cryptocurrencies have been garnering more attention from the media and consequentially from Canadian taxpayers. The nature of these cryptocurrencies have resulted in their implementation across various jurisdictions today, however, most countries differ from one another in the treatment of Bitcoins when it comes to income taxation.
Therefore, if you are uncertain about the reporting of income from earnings in Bitcoins or gains made on the sale of Bitcoins, you should seek the counsel of one of our experienced Chartered Professional Accountants in order to avoid problems arising in the future with the Canada Revenue Agency (CRA).
What Is a Bitcoin?
Bitcoin is a virtual currency called a “Cryptocurrency”. Bitcoin is just one type of Cryptocurrency from thousands of Cryptocurrencies in circulation today. It was created in 2009 by an anonymous computer programmer.
Unlike fiat currencies such as Pounds, dollars etc. which are backed by the government and can therefore be regulated by them, Bitcoins are designed in such a way that permits anonymous exchanges which has made them a major cause of concern for income tax and government authorities across the world because of the potential for illegal activities that can arise from its use.
The value of Bitcoin has experienced drastic fluctuations since its creation. Two major crashes have been recorded in the value of this cryptocurrency, one in 2011 and the other in 2013 where its value fell by 50% in a single day.
Bitcoin can be acquired by an individual in 3 ways.
With the use of computers an individual can acquire Bitcoin in an online process that is known as mining.
What is Mining?
Mining is the process of discovering new coins by setting up a computer to run processes and solve algorithms based on the architectural setup used in the creation of a particular Cryptocurrency. Each Cryptocurrency has a fixed upper number of coins that can be “discovered” therefore once they are all discovered, individuals will no longer be able to mine new coins as they have basically been mined out. The coins can be used for purchases and trade.
An individual can acquire Bitcoin by purchasing them online with traditional currency through a Bitcoin Exchange.
3. EXCHANGE FOR SERVICES
An individual can acquire Bitcoin when he/she accepts them as a means of payment for goods or services.
The tax consequences may differ depending on how Bitcoins are acquired, given the uncertainty that surrounds its taxation in Canada.
The CRA & Taxation of Bitcoin in Canada; Is the Mining or Trading of Bitcoin Taxable?
Although the CRA is yet to address the issue of Bitcoin in any of its Information Circular or Interpretation Bulletins it has however issued Income Tax Rulings and Technical Interpretation addressing the tax treatment of Bitcoin related transactions.
Responding to a recent inquiry about the tax treatments of Bitcoins, the Income Tax Rulings Directorate Issue commented on services or goods exchanges involving Bitcoins.
The CRA provided in a March 2014 Technical Interpretation, some guidance outlining its position on the income gains from Bitcoin related activities. It takes the position that when a taxpayer makes payment for a product or service using Bitcoins, such a transaction will be deemed as a barter transaction.
In the case of the disposal of Bitcoins by a taxpayer, such is subjected to taxation as either capital gains from property disposal or an income from a business. Whether the gain is considered to be capital or as a business income, will largely depend on the nature of the taxpayer’s activities and if they are of a commercial nature or not, as per the case in Stewart v the Queen, 2002 SCC 46.
Bitcoin as Barter Transactions
To have a wider grasp on how Bitcoins are to be taxed as barter transactions, it is necessary to have a basic understanding of the nature of barter transactions.
In a Bitcoin Barter Transaction, when a good or service is paid for by a taxpayer using Bitcoins, they will have to include when filing their tax returns, the fair market value of the goods they had received into their income. By doing so, this allows the value of the services or goods received by the taxpayer to be accounted for in his/her income.
Here is an example.
A clothing retail store is owned by a taxpayer who purchases a particular product of the fair market value of $40. The taxpayer pays for the product with one Bitcoin, (where One Bitcoin is $40). Since Bitcoin is not an official currency, in order to account for the entire value of the product sold to the consumer when the income of the taxpayer is being determined for the year for tax purposes, the product is valued at $40 and not the value of the Bitcoin when it is sold.
Bitcoins as Capital or Income
The income tax treatment of taxpayers who make use of fiat currency in speculating of Bitcoins by buying and selling them is totally different from those in a barter scenario. A different rule applies to a taxpayer who makes the choice to buy and sell Bitcoins with the aim to make a profit.
Basically, Bitcoin can be viewed as every other piece of property in which if they are disposed of at a price higher than they were acquired, a capital gain is made and one-half of that gain is included in the taxpayer’s income.
Complications may arise when such a transaction occurs many times in a taxation year. For example, if a taxpayer makes profits off the repeated purchase and sale of Bitcoin, this may lead to the CRA deciding to sum all profits in the taxpayer’s income as business income and not capital gain as a result of assessing the recurrent nature of the transaction as the taxpayer being in the business of speculating Bitcoin for profit purposes.
How Holding Bitcoins Attract Reporting Obligations?
The CRA made a note in a Technical Interpretation issued in April 2015 that Bitcoins which are held and situated outside of Canada and are not made use of over the course of the transaction of an active business is called “Specified Foreign Property”. The meaning of this is that the value of the Bitcoins must be reported in a T1135 statement every year to the CRA by a Canadian resident for tax purposes when the sum cost of “Specified Foreign Property”(which includes Bitcoins) is beyond $100,000.
Here’s a practical example. A taxpayer who already has T1135 filling obligations would have to report any Bitcoins owned in their yearly T1135 filings. Another great example would be that if a resident taxpayer makes an acquisition of Bitcoins valued in total to be an excess of $100,000, the resident would have to begin to disclose the total value of Bitcoins owned in a T1135 form.
Furthermore, an interest in a foreign partnership is deemed as a “Specified Foreign Partnership” in the case where the non-resident members shares of the income or loss of the property are above 90% of the total income or loss of the partnership.
In the case where a Specified Foreign Partnership holds Bitcoin situated outside of Canada which are not made use of exclusively during the course of an active business, and if a Canadian resident has an interest in the Specified Foreign Partnership then the resident has to definitely report the value in a T1135 Statement.
Taxing Bitcoin Mining Income
Questions surround taxation of Bitcoin acquired through mining. Questions such as how the taxpayer engaged in the mining of Bitcoins is taxed? Should they be taxed at the time when the Bitcoins are mined or created or should such income be deferred until such a time when they are exchanged for a more recognized form of currency?
The Uncertainty in Canadian Taxation of Bitcoins
However simple the rules about the tax treatment of Bitcoins might seem, it is still surrounded by a great deal of uncertainty.
There are still some grey areas especially regarding rules bounding foreign currency transactions involving Bitcoins.
To ensure that you do not fail in your reporting obligations it is advised that you seek prudent advice from our Montreal Chartered Professional Accountants.
This article only provides information in a general nature and is only as current as the date in which it is posted. It is not updated and therefore may no longer be current. This document should not be relied upon as it does not claim to, nor provide advice on legal or tax matters. All tax situations are specific in nature and will likely differ from the situations that are presented in the article. It is advisable that you seek and consult a tax professional if you have any specific legal or tax questions.
This document is intended to provide general information on a particular subject or subjects(s) and this article is not an exhaustive treatment of such subject(s). In accordance, the information in this document is not intended to constitute or replace accounting, tax, legal, investment, consulting, or other professional advice or services. Before any decision is made, or any action taken which might affect your personal finances or business, you should consult a qualified, professional adviser.