Within the crypto currencies investing realm, 2017 will forever be remembered as the year of irrational exuberance, where everyone from your barber to gym buddy was talking about the investing in Bitcoin or the next big alt coin (alternative coin other than Bitcoin).
In 2018, at the time of writing this article, crypto currency is here to stay, however it is debatable as to in which manner it will do so as a substitute for fiat currency, secure transaction tool, investment opportunity or a tech component of a much bigger system. While the uses are many, one concern remains constant, and that is the taxation of any resulting gains for those lucky enough to have cashed in on their newfound wealth.
Currently, Canadian regulatory authorities do not consider crypto currencies as legal tender or as a currency. In 2014, the Bank of Canada released a position paper concluding that bitcoin and other crypto currencies fail to meet the definition of money, while in 2013 an interpretation letter released by the Canada Revenue Agency (CRA) stated that bitcoin and other digital currencies were not currency but more of a commodity, like gold or oil. Thus, the tax rules concerning barter arrangements apply to bitcoin transactions and any actual selling of Bitcoin or other currencies are capital gains or losses.
For those who use bitcoin as a method of payment the CRA deems the vendor, who accepts bitcoin as payment for providing goods or services, must include the fair market value of those goods or services in his or her business income. On the other hand, it must also be recognized that when crypto is bought and sold like a commodity or arbitraged (such as trading, investing and speculating), the disposition will give rise to income or capital gains according to whether the crypto is traded on account of income, or held on account of capital.
Where it possibly gets tricky is when a person who mines bitcoins may be thought of as either acquiring a capital property or earning business income. If thought of as acquiring a capital property, the miner would have his or her gains/losses upon disposition taxed as a capital gain or loss. Alternatively, if thought of as earning business income, the miner’s income is the bitcoin’s fair market value at the time that the miner uncovered the unit. If the miner later sells the uncovered bitcoin for an amount greater than its value on discovery, the difference is included in business income and taxed at the applicable current rates in BC at 11.5% or 27%.
For those who might think that bitcoin transactions are anonymous and will allow you to safely keep this income hidden from the government, be warned that as of recently some bitcoin exchanges willingly reveal their customer data to local authorities. In addition, tax authorities themselves have adopted systems and software to help unveil a bitcoin user’s identity. The software analyzes a bitcoin transaction and traces bitcoin units to their source. In other words, it follows a bitcoin as it moves from one bitcoin wallet to another.
At the end of the day, tax has always applied to non-cash receipts and barter transactions, unless carefully structured to access a specific exemption or deferral. Whether a vendor is paid in dollars, Bitcoins or snicker bars, there is a value to what you receive and you are taxed on that value. Were it otherwise, tax planning would be simple and tax planners could all retire.
When investing in Bitcoins be prepared to recognize capital gains and pay capital gains taxes when you cash in.