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!