In a previous article, we explained the basic nature of Bitcoin, other cryptocurrencies and how they work. In the interim, the cryptocurrencies have continued to exhibit substantial volatility, which should indicate this is not an investment path for the faint of heart.
There have been some new developments, however, that indicate it might be moving at least a little into the mainstream market.
Both the Chicago Board Options Exchange and the Chicago Mercantile Exchange have started Bitcoin futures markets, which some experts think might reduce the volatility of the instrument. Merrill Lynch, a large United States brokerage house, however, announced it will not deal with these instruments because it thinks they are too speculative.
One of the hyped benefits of cryptocurrency is its relative security. Although Bitcoin hasn’t reported any breach, Coincheck.Inc of Tokyo has announced it was hacked and a competitive currency has lost almost half a billion U.S. dollars from its customers’ accounts. Once again, this reinforces the need to update your passwords regularly.
Governments with pressure from banks and major investment firms/bankers, particularly in the U.S., have already started to rein in the Bitcoin system and some banks are starting to use the same “block chain” technology to compete with Bitcoin (for a fee of course).
But back to the taxation of Bitcoin. As mentioned before, CRA sees cryptocurrency as a commodity (not a government-issued currency) and if it is used to pay for goods and services, it is treated as a barter transaction.
Simply put, currency doesn’t exist in the transfer of goods and services but a barter transaction can result in the following:
- income or expense treatment
- the acquisition or transfer of capital, inventory or personal use property
All these will have an impact on taxes.
Essentially, it means the vendor must include in income the fair market value in Canadian dollars of the goods or services sold for cryptocurrency. Similarly, the purchaser using cryptocurrency in a business transaction must also reflect the value of the cryptocurrency used in the deal in their tax filings.
Any gain or loss arising on the disposition of the cryptocurrency can be considered business income or a capital gain or loss and depends on the particular circumstances of the transaction.
Although cryptocurrencies are not considered Canadian securities, there are capital and income taxation implications to their acquisition and active trading.
With the mighty swings in Bitcoin values, admittedly some people have invested hoping for some long-term appreciation in value. Better to have bought in at $10 to $1,000 than peak prices near $20,000.
If one is not in the business of trading Bitcoin but hoping for his or her ship to come in, any success will be treated as a capital gain. If the taxpayer is in the business of trading cryptocurrency (and CRA will make the determination) then gains will be treated as income.
There are other tax implications and uses of Bitcoins. You can donate them and they do fall under the charitable donation tax credit of the Income Tax Act as long as the recipient is a qualified charitable institution. The value of the donation is the fair market value of the cryptocurrency at the time of donation.
GST/HST according to CRA also applies to cryptocurrency transactions. The vendor must collect and remit HST/GST on the transaction if it is commercial in nature.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: firstname.lastname@example.org or 800-265-1002.