Bitcoin Tax Implications and the CRA

There are many players in the world of digital currencies, like LiteCoin, Ripple, PeerCoin and DogeCoin. But in the world of cryptocurrencies, Bitcoin is king! Unfortunately, for many unsuspecting Canadians, investing or trading in Bitcoin could hold a potential risk. It could run you afoul of the Canada Revenue Agency.

Read on to learn why!

A WILD RIDE

Bitcoin has been in the news quite a lot recently. And unless you’ve been vacationing on a deserted island somewhere, with no access to internet or WiFi, it’s highly unlikely that you’ve missed the huge gyrations that this digital currency has had over the past few months.

Bitcoin Price Chart

 

But if you are a trader (or even a casual investor) in Bitcoin, you’ve probably got more than your fair share of heartburn of late. From a high of $19,343 US on Dec 16th, 2017, to a low of $6,914 on Feb 5th, 2018, the price of 1 Bitcoin has whipsawed all over the place, trading at $8,559 at the time of writing this post. By some estimates, globally, investors have lost a staggering $44B of value in their Bitcoin holdings in January 2018 alone!

Designed around the popular Blockchain technology, cryptocurrencies don’t have any tangible assets to back their value, hence the massive fluctuations in their value. And while volatility does offer some opportunities, it also poses a major risk – especially if you aren’t aware of all of the tax implications that holding or trading Bitcoins (or other similar digital currencies) can have for you.

A CANADIAN PERSPECTIVE

Although Bitcoin (and its other digital cousins) is called an electronic “currency”, unlike other currencies (popularly known as Fiat currencies) like the Canadian dollar, Bitcoin is treated as a commodity.   They aren’t supported by any sovereign (like the Government of Canada), nor are they regulated by any central authority (such as the Bank of Canada). So where does that leave Canadians who hold, or have used or traded Bitcoins?

Well, from a Canada Revenue Agency (CRA) perspective, Bitcoin is NOT a currency at all – it is treated as a digital commodity. And as such, there are tax implications that are radically different than if you invested in or traded traditional Fiat currencies. Because CRA doesn’t consider it legal tender, Bitcoin tax implications can be different than, for instance, those applied to trading/investing in stocks and other securities. For instance:

  • For tax purposes, Canadians purchasing products/services using cryptocurrencies must include such purchases as income if seller and must consider GST/HST as part of the purchase;
  • If, as is likely the case, you have incurred any losses or gains from Bitcoin-related transactions, those gains and losses may be reported as capital gains/losses in your tax returns – just as you would if you bought or sold a regular stock or a commodity like gold (but only if you are an investor);
  • If you are minder or a trader of bitcoin, or hold it as inventory and not capital property, then you will have to report gains or losses as business income and consider GST/HST implications;
  • As an employee, if you are paid in Bitcoin, such payments should be converted to equivalent Canadian dollars, and reported as your income under the Income Tax Act;
  • However, as a commodity, trading in Bitcoin is subject to the barter rules enshrined in the Income Tax Act, which try and mimic the rules of regular taxable business income;
  • And if you are a Bitcoin “miner”, using your home or business computers to generate more Bitcoins – well, that has tax implications too! The CRA expects that you declare all of your mined Bitcoins as your income for the year. One bit of relief: You can off-set some mining expenditures (like pro-rata utility bills) against that income.

Of relevance is the fact that the CRA will likely treat any losses you may have suffered, in trading Bitcoin, as loss of capital, eligible to be off-set only against any other Capital Gains that you may have accumulated. However, be mindful of the fact that the CRA will likely treat gains from selling/trading Bitcoin at par with your regular income.

So, what does this mean for Canadians? It means that unlike capital gains generated from the sale of investments, which are only included in income at 50%  and then taxed at your marginal tax rate, gains from trading Bitcoins can be, and most likely will be, treated as regular income – fully included in income and taxed at your marginal rates.  The actual tax treatment will depend on the relationship of your activity and intention with the accumulation or disposition of the digital currency.

To put things in perspective, consider the example where you may have purchased CAD$10,000 in Bitcoins, and disposed of them in late December for CAD$15,000. If you held the coin as investments, then the $5,000 gain you earned is to be reported as a Capital Gain, half included in your income and taxed at your marginal rate. If, for instance, your marginal rate is 42%, you’d pay $1,050 as income tax. If this $5,000 had been a gain from business activity and you’d end up fully including the gain in income and then paying just $2,100 as tax (at 42%). 

Now consider a more draconian tax implication. For the purpose of this example, we’ll assume CAD-USD parity.

Let’s assume you purchased a single Bitcoin back on Feb 5th, 2017 – when the price was $1,009. On Dec 16th, 2017 you paid for a car using your single Bitcoin. Let’s assume the value of the car you purchased was $19,343 (inclusive of GST/HST). You’d feel pretty happy at how well your single Bitcoin investment did. But don’t rest easy yet!

According to the CRA, your car-purchase transaction has resulted in a Capital Gain (if the coin was a capital property because of an investment purpose and intention) of $18,334 (the $1,009 price of Bitcoin when you bought it back in Feb 2017 minus $19,343 which is the cost of the car). Once again, assuming you are in a marginal tax bracket of 42%, come tax-filing time this Spring, you’ll owe CRA a whopping $3,850.14 in taxes!

EYES WIDE OPEN

Bitcoin is currently a “fad” that’s finding its way. However, given that the rapid rise in its price has resulted in a rare revenue opportunity for the government, the Canada Revenue Agency is unlikely to change its stance about the “commoditization” of this digital asset.  As a result, there are far-reaching income tax implications for Canadian Bitcoin owners and investors.

Before you file your tax returns later this spring, it may behoove you to take a hard look at the Bitcoin tax impact on your income/capital gains for the year.  In the event of a CRA tax audit, you may even face stiff penalties (and interest) for not declaring your Bitcoin assets or for reporting them incorrectly when filing your taxes. With proper planning and sage professional advice, you could not only continue to stay on the good side of Canada’s tax watchdogs but also enjoy your Bitcoin windfall stress-free!

Comments

38BWD22 Mr_Potatohead Wed, 02/14/2018 - 19:55 Permalink

 

Yes, an important + 1.

Our accountant told us the IRS (American equivalent of the Canadian tax guys) are looking real hard into some Americans (probably larger fish, but who knows).

I will be reporting 2017 BTC gains as per her suggestions of accounting for "realized gains" (which are capital gains).  Just holding BTC, not using them (cashing them in, etc.) apparently incurs no tax consequences.  Even trading BTC for other things (gold, for example) would be a taxable event.

Be smart, the IRS is using "Chainalysis" among other software to track BTC use.  Be careful, be smart.

In reply to by Mr_Potatohead

Heros 38BWD22 Thu, 02/15/2018 - 04:47 Permalink

Be a smart goyim slave, and pay your taxes to your king in Jerusalem.

Most Crypto "investors" have been moving in and out of various cryptos, each time being a taxable event.  The accounting will likely be a nightmare and if you use HR Block it is going to cost lots of money and nerves.

In reply to by 38BWD22

Karl Marxist Wed, 02/14/2018 - 18:41 Permalink

Fuck taxes. Co-ops for everything, period. Need a road or road repair or community engineering or whatever? Why pay for lazy, immigrant crap labor that is costly and inefficient? Garner from one's own immediate surroundings and the co-op hires and pays through agreed upon fees to cover costs sent on the blockchain. Boom. No governments, no Bushes. No Federal Reserve, no Clintons, no Soros, no Rothschilds, no Israel. Just a new future without them.

pitz Wed, 02/14/2018 - 18:54 Permalink

Just to add this, no records = the CRA considers the 'cost base' of an asset to be $0.  And you, unluckily, have the burden of proving otherwise in Tax Court.  

bluskyes Wed, 02/14/2018 - 19:39 Permalink

buy with cash, sell for cash

do not get your person mixed up in the mess

In Canada, sell electric space heaters that are made of bitcoin miners.

Rhal Wed, 02/14/2018 - 20:06 Permalink

I'd just like to know how they plan on tracking us. Same as the IRS, even if the exchanges report IDs to the governments that would only happen when cashing out.

What if I never cash out?

What bugs me most about taxing investments such as this is that their tax rate is not inflation adjusted: if the dollar becomes worthless they can still tax us on millions that will have a far lower purchasing power.

Punish the smart investor. Nothing new here.

Yellow_Snow Rhal Wed, 02/14/2018 - 21:22 Permalink

Trying to track crypto's would be a total nightmare...  There is no way they can put hundreds of man hours trying to track some college kid's .000345467 Bitcoin trading 35x on various international exchanges to capture his $35 of tax liabilities.  That's complete BS... and everyone knows it.  Even the IRS Bootlickers...

The IRS might go after some political target like Trump Jr, just because they are a corrupt agency.

In reply to by Rhal

Bemused Observer Yellow_Snow Wed, 02/14/2018 - 23:26 Permalink

Not to mention the ever-changing values...your liability could differ depending on the time of day. That shit has swung 10,000 dollars in a month and a half. Your auditor will go in the back room to calculate and no one will ever see him again...

Yeah, they're gonna 'track' this...No, they'll go after a few big players, and hope to scare everyone else, because if they don't, they're SOL and they know it. They don't have the resources to go after everyone. It's like traffic court...they depend on you making a deal and paying the fine. They DON'T want you asking for your day in court. If everyone did that, traffic court would shut down.

They are losing control over shit faster than you think. Expect to hear a lot of threatening noises coming from various 'authoritative' agencies in the months and years to come.

In reply to by Yellow_Snow

Silver Savior Wed, 02/14/2018 - 20:12 Permalink

I prefer dogecoin and ripple for investment on volume than a Bitcoin or two. My system has worked out pretty well and avoided the huge Bitcoin drop. 

It's not all roses with the recent "everything" crash but it worked out better. If I was all in on Bitcoin alone it would have been way worse. 

People don't understand what you can do on huge volume with alt coins 

Silver Savior Yellow_Snow Thu, 02/15/2018 - 00:41 Permalink

I am still trying to decide when to sell the ripple. It's one of those things I wanted to hang on to for gains like to $10 each. 

But with the recent crash I see how low it can go and that worries me. $3 would put it into serious consideration this time. It's when people get greedy they lose their arse. 

It might just be on to other things after that. Unless there will be another huge pullback down the line. $3 I think is a well rounded gain. 

In reply to by Yellow_Snow

bjax Thu, 02/15/2018 - 06:46 Permalink

Not to mention you can move crypto around on devices, without it ever moving on the chain. How are you going to tax that? Opendime as an example is perfect for moving value around without it ever moving on the block chain. When eventually the person, does cash it in, then who do they tax? It may have gone through a dozen hands, by passing the device onto the next person. Better idea is if they allow people to pay their taxes with Bitcoin, end of story. If not, then expect a big shift away from the tax man.

dark pools of soros Thu, 02/15/2018 - 11:00 Permalink

" assuming you are in a marginal tax bracket of 42% "

 

hahahahahahahahahahahahahahahahahahahahahahhahhhahahahahahahahahahahahahahahaahhahaahahahaa

 

who the fuck lives with that