It seems like all anyone can talk about these days is the value of Bitcoin and other cryptocurrencies. But what does this mean for Canadians and the Canadian tax authorities? Below are the answers to five important questions for Canadian taxpayers who interact with cryptocurrencies:
1. What is it?
The Canada Revenue Agency (the "CRA") has said that cryptocurrencies are not "money" or a "currency" for Canadian tax purposes, but rather should be treated as a commodity. Some consequences include that: (i) a cryptocurrency is not eligible for investment in a registered plan, and (ii) transactions dealing in cryptocurrencies fall under the CRA policy for barter transactions.
The easiest way (in the author’s admittedly non-technological opinion) to think about a cryptocurrency is to equate it with gold. One can pay in cryptocurrencies, trade in cryptocurrencies, mine cryptocurrencies, or interact with cryptocurrencies through offshore entities much like one can do with gold.
2. What if I get paid in it?
The CRA has said that paying in cryptocurrencies fits under its policy for barter transactions which is where "two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money.1" The value of cryptocurrencies received in exchange for the goods or services is to be included in income (whether as business income or capital gain) and such values must be stated in Canadian dollars. GST/HST would also apply on the exchange of cryptocurrencies for goods and services.
Likewise, if you use your cryptocurrency to pay for goods, such exchange is governed by the barter transaction principles and will trigger a disposition for income tax purposes.
Furthermore, if your salary from employment is paid to you in cryptocurrencies, such amount, which must be computed in Canadian dollars, must also be included in your employment income. Determining the value of a cryptocurrency is another task, but might be increasingly easier given the rise of reported values on various digital exchanges. The high degree of daily fluctuation in the price of a cryptocurrency necessitates the use of a daily (or longer time period) average in the determination of value.
3. What if I trade it?
Buying or selling cryptocurrencies like a commodity (i.e., speculating on the volatility of cryptocurrencies), results in either a capital gain (or loss) or business income (or loss). The analysis of whether this constitutes income or capital is a long legislated tax issue that is not unique to cryptocurrencies. The key question is whether you are holding cryptocurrency for capital appreciation (and thus on capital account) or are you trading the currency as a business (and thus holding the cryptocurrency on income account). Some of the considerations include: (i) frequency of transactions, (ii) period of ownership, (iii) knowledge of matters, (iv) relationship to the taxpayer’s business, (v) time spent, (vi) financing, and (vii) advertising.
If you purchase cryptocurrencies in an initial coin offering, you will generally pay an amount for such cryptocurrency at a negotiated discount rate. There would be a taxable event once you dispose of such cryptocurrency at a later date. For the entity issuing the cryptocurrency to raise capital, it is likely disposing of an asset and thus has a taxable event on the issuance of the coin. The tax effects of this are different than if the entity issued shares or debt to raise capital.
4. What if I mine it?
“Mining” of cryptocurrencies is either undertaken for profit (and thus taxable) or as a personal hobby (and thus not taxable). It is not always easy to distinguish whether an activity resembles running a business or a personal endeavour. If you are mining cryptocurrencies as a business, some of the tax consequences generally include: (i) any income from the business will be included in your income at the end of the year based on the value of your inventory (i.e., the cryptocurrencies), and (ii) any thefts or losses are deductible from your income if they are an inherent risk to carrying on the business.
5. What if I take it offshore?
If you invest in securities of offshore entities that deal in cryptocurrencies, hold cryptocurrencies or get paid in cryptocurrencies, or if you hold such cryptocurrencies directly in an offshore account, you do not escape the Canadian tax net. Holding securities of an offshore entity may result in annual deemed income to you if such entity does not make regular distributions. In addition, there may be Canadian transfer pricing implications for a Canadian entity interacting with such an offshore entity. According to the CRA, such securities and the cryptocurrencies themselves also fall under the foreign reporting rules for tax purposes.
The cryptocurrency market and the blockchain technology that enables it to exist, are evolving rapidly, and regulators everywhere are still trying to figure out how to approach them. It is difficult to see how the CRA can stay on the sidelines as the use of cryptocurrencies increases; we will watch for and inform you of any significant developments in the tax treatment of cryptocurrencies from the CRA. In the meantime, before one interacts with cryptocurrencies, it is advisable to check and understand the relevant income tax implications.