Tax Issues of Digital Currencies like Bitcoin
Canada’s tax system if relatively comprehensive – meaning that most accretions to wealth are taxed at some point. Bitcoin and other digital currencies (for example Etherium) are not tax exempt and, for tax purposes they are not treated the same as Canadian or foreign cash. The Canada Revenue Agency (“CRA”) does not consider bitcoin and other digital currencies as a “currency”.
If you use electronic currencies to buy or sell items, then the barter transaction rules apply. A barter is the trade of goods or services without the use of cash. The general rule is that the value of whatever is obtained is assumed to be the value of whatever is given up in exchange for that. This can lead to valuation problems when digital currencies are used and there is a difference in the value of the currency at exchange time and the value of the good or services obtained. Either way, it is a taxable event that has to be reported to the CRA in your filings. If the exchange would be subject to GST/HST, then the tax must be computed at the time of sale and remitted in normal course.
If you use electronic currencies to speculate on their change in value over time, in other words if you are a trader of these currencies, then the gains and losses are business gains and losses. If you invest in the currencies, meaning you buy them as an investment property from which you intend to gain income, then the currency may be a capital property, and the gain or loss from a disposition of the property will be a capital gain or loss. Whether or not you hold the digital currency as capital or business property (inventory) will depend on your particular circumstances. This is not always an easy determination to make.
Miners of digital currencies are also engaged in taxable activities unless the mining is a hobby (a relatively high hurtle to meet with respect to digital currency mining). The mining activity will likely be considered to be business activity and any gains and losses treated as business gains and losses.
There may also be reporting requirements. For example, if you hold digital currencies in foreign bank accounts or in a foreign partnership, the bitcoin may be considered to be a “specified foreign property” that has to be reported annually on a T1135 form. The failure to report foreign held digital currencies may expose you to penalties, for each year, of up to $24,000.
As can be seen, the tax treatment and reporting obligations when holding or using digital currencies is complex. A tax professional must consider your unique circumstances and use of digital currencies to determine if you have been reporting the gains or losses correctly. If you have failed to report your gains or have been reporting them incorrectly, you may be able to avoid the penalties and potential criminal prosecution by making use of CRA’s Voluntary Disclosure Program.