Canada will tax your bitcoins

by , Nov 7, 2013 | 9:59 am

The Canada Revenue Agency (the Canadian equivalent of the IRS) just issued its first release on how it will treat virtual currencies for taxation purposes. There is not much new here — the CRA sent an e-mail to the CBC back in April about bitcoin taxation — and the government leaves several questions unanswered. Still, it’s an actual release from the CRA and not just a communication to a news outlet, which is helpful to those advising taxpayers. And even though the interpretation bulletins and the release do not have force of law, this communication does at least put up some signposts about the CRA’s thinking about bitcoin.

The release — styled one of the CRA’s fact sheets on “digital currency” — is available here.

No Canadian tax practitioner will be surprised that a bitcoin-denominated transaction will often be taxable where that transaction would be taxable without bitcoin. For example, under subsection 5(1) of the Income Tax Act, a person’s income from office or employment includes “the salary, wages and other remuneration, including gratuities, received by the taxpayer in the year.” Salary, wages, and remuneration paid and received in bitcoins are taxable under this provision, just as salary, wages, and remuneration received in US dollars, UK pounds, or Euros are taxable. (Right now I’m leaning towards treating bitcoins for most Canadian tax purposes just like any other currency — more on this below.) For good measure, section 6 of the Act sets out a whole laundry list of items that are included in office and employment income — things like free rent, housing allowances, living expenses, insurance benefits, and a standby charge on the use of company cars. If you are a resident of Canada and receive employment income in bitcoins, you’ll be taxed on it. I think similar arguments can be made for many provisions in the Act, e.g., business income and so-called ‘passive’ investment income like dividends and royalties.

But no-one had any idea until this past April how the CRA was thinking about bitcoin, when the Agency sent an e-mail to the CBC setting out its views. The recent CRA release repeats the two general bases on which bitcoins — or any virtual currency — will be subject to Canadian taxation: 1. when used as barter; and, 2. when bought and sold as a commodity. The barter rules, opines CRA, apply when virtual currency is used to pay for goods or services. The example given in the release is paying for movies using digital currency; the value of the movies, says the fact sheet, should be included in the seller’s income for tax purposes. As a general proposition, this makes sense for business-owners, whether it’s paying at a movie theatre or paying for a download on your smart TV. Or, to use another example, if I sell an e-book and accept bitcoin for the transaction, that’s revenue for accounting and tax purposes to me, provided I’m in the business of selling such things. I would also argue that, if the book purchase were an ordinary expense of the buyer’s business, then it’s a deductible expense to the buyer, whether the transaction is in bitcoin or in some other currency.

There’s an issue with the insinuation in the CBC piece and the fact sheet that any barter transaction with bitcoin is subject to taxation, though Interpretation Bulletin IT-490 (Barter Transactions) avoids this pitfall. The fact sheet says that “[a] barter transaction occurs when any two persons agree to exchange goods or services and carry out that exchange without using legal currency.” That’s true. But the release goes on to cite the movie example and reaches the blanket conclusion that the value of the movies “must be included in the seller’s income for tax purposes.” That’s not necessarily true. For barter to be taxable, it has to be a transaction involving income from a productive source. A ‘source’ includes, for instance, a disposition of property, or income from a security, a job, or a business. Gambling winnings are almost invariably not a source (with a big exception for truly professional poker players here), nor are non-business transactions between acquaintances. So if I help you move and you give me a case of beer (or some bitcoins), that’s not taxable unless I’m in the moving business. But if you pay me in bitcoins for legal advice, that is taxable to me as income from a source.

As to buying and selling bitcoins as a commodity, the fact sheet says only that “any resulting gains or losses could be taxable income or capital for the taxpayer.” This statement isn’t overbroad like the barter statement, so that’s a good starting point. Losses aren’t taxable in the hands of taxpayers; if anything, they’re deductible. What the CRA is primarily after here are people speculating in bitcoins, and they are indicating that those gains or losses may be taxable (or deductible) on account of income or capital. So-called income gains are fully includable in income in Canada, and fully taxable. Capital gains are effectively only 1/2 taxable. The whole income-capital distinction is beyond the scope of this post, but think of a capital gain or loss typically arising when you dispose of an asset that’s not inventory or production materials. That said, if you are in the business of simply buying and trading those assets, all such dispositions are more likely to be on account of income and not capital. The bottom line on income vs. capital for bitcoin: very generally, if you buy bitcoins and they sit in your bitcoin wallet, appreciate in value, and you sell them, you’ll likely be taxed on that transaction as a capital gain in Canada. If you are in the business of buying and selling bitcoins as a speculator, any gains will probably be on account of income.

While helpful, the comments do not address a key bitcoin area: how is mining to be taxed? According to a post clarified by Gulden Crypto, the CRA has had nothing to say about this so far. I see the issue as whether bitcoin will be treated as a currency for mining purposes or whether it will be treated like a precious metal that is actually mined out of the ground — gold or silver, for example. Mark Goodfield, a Toronto accountant, suggests that payment for computer power in bitcoin may be like a coupon being issued by a retail store, although it seems to me that that would likely still be taxable under the barter rules, provided they are source transactions.

I said at the Future of Payments conference this past May and still believe that the CRA is making this more complicated than it needs to be. If bitcoin is treated as an actual functioning currency, then there’s no reason to have resort to the barter rules, for example, and the taxation of mining might become clearer. Transactions could be translated on the day of occurrence using some reasonable exchange rate between bitcoin and Canadian dollars. The CRA will claim that bitcoin is not a legal currency, i.e., that it hasn’t been adopted by any national government as its legal tender. That’s a point that should be addressed. Would the CRA then need to accommodate every virtual currency having the same properties as bitcoin, including its decentralized nature, the same way? What virtual currencies would the CRA treat this way, and which ones would it perceive differently? These questions are worth grappling with. More to the point, they’ll eventually have to be answered as more people participate in the bitcoin economy and report their economic activities to the tax authorities.

7 Comments to “Canada will tax your bitcoins”

  1. whatever

    So basically, stop using bitcoin and switch to litecoin and just use a non-Canadian exchange. Got it! Thanks

  2. Stuart Hoegner

    Just remember that the release applies to virtual currencies generally, of which bitcoin is one example — not exclusively to bitcoin. From a self-reporting perspective and given that one who is resident in Canada is (subject to applicable treaty rules) taxable on worldwide income in Canada, the location of the exchange is irrelevant.

  3. cdew

    income and capital gains taxation is assuming that the btc is sold back into fiat currency, and i would think there would have to be a traceable transaction such as a deposit into a bank acct for this to be even feasible. i mean if u just keep btc in a digital wallet and spend this btc directly, rather than CAD or USD, there is essentially no way for the gov’t to collect this sort of tax, yes?

  4. Stuart Hoegner

    Generally, you’re right: the gain would only be taxable when crystallized into fiat through a disposition. (So interesting question: What happens when you exchange for other virtual currencies? Will the CRA treat that as a disposition and apply the barter rules? Possibly.) You also correctly identify that there are significant potential enforcement issues around bitcoin holdings. The CRA sometimes struggles to identify foreign bank accounts subject to its audit powers. My post was largely based on the fact that Canada has a self-reporting system, i.e., these are the kinds of issues we need to look at in the context of filling out your tax returns and disclosures completely and accurately.

  5. Matt

    Here are some things I still don’t get,

    Employment income:
    If I receive bitcoins as a salary, how are they taxed?
    What is the CAD value a 100% bitcoin salary?
    Does the CRA recognize a particular exchange for value, or does my employer set a value?
    If I receive bitcoins once a month as salary, are the individual sums taxed at the day they are issued, or only when (and if) I convert these to CAD?

    Result of mining:
    When are my mined bitcoins taxable? (Once they are mined? Once they are converted to CAD? Once they are bartered for goods? Once they are traded for other crypto-currencies? etc.)
    If I mined a bunch of bitcoins over a year ago, but held them in speculation, can I claim capital gains/losses upon eventual conversion to CAD?

  6. Godrej

    Regarding employment income – the amount of bitcoins you receive is categorized under a barter transaction. As for value, the cra has specialists dealing with value, your income could also be compared to other years to test for consistency. The value could also be taxed on a weighted average – as is done with individuals who work overseas and are paid in a foreign currency.

    Finally the disadvantage of being paid in bit coins for employment is the added capital gains component. Being paid cash doesn’t carry this problem.

    I don’t like to assume but if you were thinking of conning the CRA, please don’t.

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