Transaction in cryptocurrencies like Bitcoin and Litecoin are become more common every day. There are those who are doing business, making purchases, or doing their personal transactions using Bitcoin and other cryptocurrencies, and some people are investing in the currency for speculative purposes.
CRA has taken the position that where Bitcoin is used to complete a transaction, it should be dealt with for income tax and HST purposes like a barter transaction. The barter transaction rules have been in place for years. If you complete this type of transaction, CRA wants you to simply value what you paid or received as if it were a cash transaction. You would then report it for income tax or HST purposes the same way.
For the Bitcoin investor, CRA has said that while cryptocurrencies are not “money” or “currency,” they should be treated as a commodity, like gold, for Canadian tax purposes.
Buying or selling cryptocurrencies, like transactions with commodities, will trigger either a capital gain (or loss) or business income (or loss). The normal rules of whether buying or selling a commodity constitutes income or capital will apply. If you trade frequently is likely that the gains (or losses) would be business income (or loss). Conversely, if the Bitcoin was purchased a year ago, and the taxpayer never traded it, and does one trade before year end, it is virtually certain that the gain would be on capital account.
Some factors CRA will consider in determining the tax treatment include:
- frequency of trades,
- period of ownership,
- knowledge of matters,
- relationship to the taxpayer’s business, and
- time spent on it.
A third Bitcoin activity is mining for Bitcoins. Mining is where you use your computer to assist in the processing of transactions for Bitcoin, and you are paid for this service in bitcoins. Mining undertaken for profit is taxable. Mining undertaken as a personal hobby may not taxable. If are mining as a business, some of the tax consequences generally include:
- income from the business is included in your income at year end based on the value of your inventory (i.e., the cryptocurrencies), and
- any thefts or losses are deductible from your income if they are an inherent risk to carrying on the business.
If you invest in securities of offshore entities that deal in cryptocurrencies, or if you hold such cryptocurrencies directly in an offshore account, Canadian Foreign Accrued Property Income (FAPI) rules will likely apply.