Everyone is talking cryptocurrency, especially Bitcoin. But what exactly is it?
Cryptocurrency is digital or virtual currency that operates on a peer-to-peer network, independent of a government or bank.
If you’re using cryptocurrency as part of your business, there are a few things you need to know come tax time:
For one, the CRA treats cryptocurrencies as a commodity for the purpose of the Income Tax Act, and using currency, such as bitcoins, to purchase goods or services would be treated as a form of barter transaction. However, while what constitutes a barter transaction is not defined in the Act, the CRA considers that a barter transaction occurs when parties agree to and carry out a reciprocal exchange of goods or services.
It’s fundamental that the parties involved consider that the value of whatever is received is at least equal to the value of whatever is given up in exchange.
Exchanges of one type of cryptocurrency for another is also governed by the barter transaction principles; therefore, the exchange would trigger a disposition for income tax purposes.
Second, the treatment of buying and selling Bitcoins using traditional currency will either be on account of capital or on account of income. Some points to note:
- If the cryptocurrency is considered to be capital in nature, only 50% of the gain realized from its sale is taxable as a taxable capital gain.
- If the cryptocurrency is viewed to be inventory of a business, any gain realized on a disposition is fully taxable as business income — regardless of whether or not the transaction was not itself in respect to actual business carried on.
The circumstances under which a transaction will be treated as being on account of capital, or on account of income, have not yet been described (do you see a pattern here too?). The determination is made on the facts of each particular case; such as the frequency of transactions, period of ownership, knowledge, relationship between the transaction and the taxpayer’s business, time spent and financing.
Third, while the CRA has not yet provided detailed guidance on GST / HST implications of cryptocurrency transactions, they were kind enough to provide us with some examples:
- “In those transactions where a taxable supply of a good or service is made and the consideration for that supply is bitcoins, the consideration for the supply is deemed to be equal to the fair market value of the bitcoins at the time the supply is made for the purposes of determining the GST/HST payable for the supply.”
- “For example, if a GST / HST registrant sells a good for 10 bitcoins and the sale is subject to GST / HST, the registrant will be required to collect the GST / HST calculated on the fair market value of the 10 bitcoins at the time of the sale. The registrant will be required to include in its net tax remittance the GST / HST collectible and the recipient, if a registrant, would be eligible to claim an input tax credit for the GST / HST to the extent the good is for consumption, use or supply in the recipient’s commercial activities.”
Fourth, Bitcoins are created by a process called mining. When a taxpayer mines bitcoin in a commercial manner, the activity will be considered business activity and the valuation of inventory at the end of year is determined under the Act. It’s important to note that the inventory is valued at the cost at which it was acquired.
Fifth, you are expected to report income from domestic or foreign sources — yes, even when using cryptocurrency. If you receive cryptocurrency as payment for goods or services, you are obligated to include the fair market value of the cryptocurrency in computing gross income. This fair market value is also the tax basis of the cryptocurrency received as payment for goods or services by the individual.
Finally, Bitcoins and cryptocurrency in general are still fairly new. Therefore, the determination of their legal and regulatory status is still ongoing. As there is still a great deal of uncertainty surrounding the taxation of such currencies, if you have any specific questions regarding your business or personal taxes it’s important to contact us: email@example.com, or by phone: 1.800.461.1096