Do you need to know “Bitcoin” taxation in Canada? The answer is yes if you are dealing in bitcoins or investing in bitcoins. An understanding of bitcoin taxation in Canada will help in your tax planning and probably gives you an opportunity for tax savings. Tax on bitcoin can follow from two streams which are Canadian tax on capital gains or tax on business income.
What is a Bitcoin?
Bitcoin is a type of virtual currency known as “cryptocurrency.” This was initially generated by an anonymous computer programmer in 2009. Being a virtual currency, Bitcoin has been designed to allow for any type of exchange. Bitcoin has become a cause for concern for tax and other authorities worldwide due to its nature and the potential for money laundering and other illegal activities.
Bitcoin is more popular than other cryptocurrencies like Dogecoin, Litecoin, and Ethereum. Bitcoins have become the center of attention in the market and for Canadians.
Recently, government officials from the United States of America and the United Kingdom have agreed to heighten the focus on the illicit use of Cryptocurrency and ransomware, as well as to continue the dialogue about the developing threats to the security of the nation.
People around the world are now using and dealing with Bitcoins in various parts of the world. However, taxation of Bitcoins differs from one country to another country based on their own income tax regulations and interpretation in the specific country. If you are dealing in Bitcoins you may be thinking about how does it taxed in Canada and what are the reporting obligations that you may have. You have earned in Bitcoins and now how do you report profits on the disposition of Bitcoins. I would recommend that you should consult with your tax professional and seek the advice of an experienced Tax professional to avoid any problems with the Canada Revenue Agency in the future.
Since the time when Bitcoin was created as a cryptocurrency, its value has unexpectedly fluctuated from time to time. So far, there have been few crashes in the value of Bitcoin. Of those crashes, two major were seen in 2011 and 2013 in the value of Bitcoins. In a single day Bitcoins value was lost over 50%. Recently achieving a milestone when in October 2021 an exchange-traded fund, or ETF, was linked to bitcoin is now on the New York Stock Exchange. It is not the actual trading of bitcoin, but another financial asset that derives its value based on the value of the bitcoin. Another financial asset that is linked to the value of bitcoin can be bought and sold by investors on the stock exchange.
A person can acquire Bitcoins in there following ways:
CRA position – Bitcoin Taxability in Canada?
We have not seen any Information Circulars or Interpretation Bulletins from the CRA, addressing the issue of taxation of Bitcoin so far. However, there are Income Tax Rulings and Technical Interpretations issued by CRA to clear its position on the taxation of Bitcoins and the transactions in Bitcoins.
In response to a recent tax inquiry about the Bitcoins taxability, the Directorate of Income Tax Rulings has issued and commented on the transactions of goods and services where Bitcoins are exchanged for goods and services. CRA has also provided a Technical Interpretation when you have income from Bitcoins. In this Technical Interpretation, CRA has outlined and has issued some guidelines to deal with the taxation of income from Bitcoin.
As per CRA Technical Interpretation
Barter Transactions – CRA considers it as a barter transaction when buying or selling any goods or services in exchange for Bitcoins.
Business income and Capital gain – CRA consider it as either a Canadian tax Capital gains or a Business income when buying your Bitcoins in exchange for traditional currencies. Whether it is to be treated as business income or Canadian tax on capital gains will depend on the taxpayer’s activities and that will be determined based on the determination where the activities are of business nature or investment.
Barter Transactions – Bitcoins taxation
Usually, a barter transaction occurs when you buy or sell a product, property, or service in exchange for another product, property, or service. Similarly, you can buy a product or service in exchange of bitcoins. When you do so, CRA considers the fair market value of the product or services received as your income to be included on your income tax return. Normally the cost or the fair market value of the product, property, or services you gave can be deducted from your income.
Bitcoins as Income or Capital
Bitcoin is a virtual currency known as cryptocurrency. It is not a legal currency. When you buy or sell bitcoins in exchange for legal currency, CRA considers it differently than a barter transaction. In this scenario, a bitcoin is considered a property, goods, or like a unit of publicly traded shares. When you buy a bitcoin in exchange for legal currency, the amount of legal currency you paid becomes the adjusted cost base for the bitcoin that you purchased. When you sell the bitcoin in exchange for legal currency, now the amount of currency you received becomes the consideration. You will need to report gain or loss by subtracting the adjusted cost base from the consideration you received. If the transaction is of a capital nature, then half of the gain or loss be reported as gain or loss on your tax return. If the transaction is considered as a business transaction, then all the income or loss is reported on your income tax return. Challenges occur when depending on the different types of transactions and scenarios it may be complex to find out the adjusted cost base of a transaction.
Does holding Bitcoins attract reporting obligations?
CRA has stated in its Technical Interpretation that if you hold bitcoins outside of Canada which are not used exclusively while carrying on an active business can be considered as specified foreign property and you may have a reporting obligation in this regard. That means if you own/hold more than $100,000.00 specified foreign properties outside Canada at any time during the tax year you need to report on form T1135. In the above bulletin, CRA identifies that bitcoin can also be considered as specified foreign property for T1135 reporting purposes. For further information on “Reporting obligation – when owning more than $100,000.00 properties outside Canada” please visit our other Canadian blog.
Bitcoin Mining Income
Taxation of bitcoin mining is complex and still unclear from CRA stands point when it relates to a taxable event, timing, determining the adjusted cost base, reporting obligations, etc. Effective planning and guidance from a tax expert can reduce the risks of your tax and reporting obligations.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.