The wild Bitcoin ride continues but is it taxable?
The short answer to the taxation question is yes, and in several different ways, but essentially Canada treats Bitcoin and other cryptocurrencies as a commodity and not a government-issued currency.
Its use is considered a barter transaction and is taxed accordingly. Transactions using a cryptocurrency are also subject to HST/GST and holding them overseas also brings foreign investment rules into play
However, before we get into taxation proper, which we will cover in our next article, it might be useful to get a better understanding of the nature of Bitcoins.
The wild fluctuations in the value of Bitcoins may appear baffling. The coins are called a cryptocurrency because they exist only in digital form. They are not backed by any government, bank or other currency, which probably irritates all of them.
Investing in keystrokes on a computer might seem foolish. Indeed, one of the richest men in the world, Warren Buffet, has warned that this is a speculative bubble, driven more by emotion than logic and will surely come crashing down.
In 2012, you could get a Bitcoin for under $10 and at the beginning of 2017 they sold for about $1,000. Reaching a peak of almost $20,000 per Bitcoin in late December 2017, the market valuation of Bitcoin reached over US$275 billion. As remarkable as that amount seems, compared with the market value of money supply of US$13.6 trillion (using the M2 measure), it places the size of the market in relative perspective.
To set the record straight, however, the currency issued by Canada, and the US $13.6 trillion referred to above, is only backed by approximately 10 percent in reserves and the rest of the value is really only a digital record like Bitcoin. But it is tracked, backed, traced and monitored by governments and a world-wide community of interconnected banks to prevent fraud, forgery, money laundering and misuse for illegal and underworld activities.
There will only ever be 21 million Bitcoins in play, compared with potentially an unlimited supply of government currency and it may explain why this less liquid investment is driven more by a desire to get on board before it continues going up. But the truth is, what goes up may also come down in dramatic fashion … and yes, may go up again.
Although Bitcoins are getting most of the attention, there are some 900 different cryptocurrencies out there. Bitcoins are simply a string of digital characters recorded on a giant, secure (so far) digital ledger. This ledger tracks your purchases, trades, sales of Bitcoin and transfers to someone else through the purchase of regular currency, other cryptocurrencies or goods and services.
Initially the criticism of Bitcoin (and valued by some) was it could be used for illegal purposes (mostly drug trafficking) because it couldn’t be tracked. It now is being forced to come into the mainstream and comply with international anti-money laundering regulations and the taxation codes of various countries including Canada and the United States.
One appeal of Bitcoin is that the price is not controlled by large financial institutions such as banks, insurance companies, large investment pools and mutual funds. They frequently use program or computer-generated trading that affect stock market prices, effectively leaving the individual investor on the sidelines.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: email@example.com or 800-265-1002.