Are Bitcoin Gains Taxable? | FBC, Canada's Farm & Small Business Tax Specialist

Are Bitcoin Gains Taxable?

Are Bitcoin Gains Taxable?

Are Bitcoin Gains Taxable?

Bitcoin has taken the world by storm and if you jumped on even just a few months ago you may be sitting on a rather large gain. (Or a loss if you bought at it’s peak in December.)

You may be wondering if any profits in your Bitcoin or other cryptocurrency accounts are taxable.

The short answer to the taxation question is yes, and in several different ways, but essentially Canada treats Bitcoin and other cryptocurrencies as a commodity and not a government-issued currency.

Its use is considered a barter transaction and is taxed accordingly. Transactions using a cryptocurrency are also subject to GST/HST and holding them overseas also brings foreign investment rules into play.

However, before we get into taxation proper, which we will cover later, it might be useful to get a better understanding of the nature of Bitcoins.

What is Bitcoin?

The wild fluctuations in the value of Bitcoins may appear baffling.

The coins are called a cryptocurrency because they exist only in digital form. They are not backed by any government, bank or other currency, which probably irritates all of them. 

Investing in keystrokes on a computer might seem foolish. Indeed, one of the richest men in the world, Warren Buffet, has warned that this is a speculative bubble, driven more by emotion than logic and will surely come crashing down.

In 2012, you could get a Bitcoin for under $10 and at the beginning of 2017 they sold for about $1,000.

Reaching a peak of almost US$20,000 per Bitcoin in late December 2017, the market valuation of Bitcoin reached over US$275 billion. As remarkable as that amount seems, compared with the market value of money supply of US$13.6 trillion (using the M2 measure), it places the size of the market in relative perspective.

To set the record straight, however, the currency issued by Canada, and the US$13.6 trillion referred to above, is only backed by approximately 10% in reserves and the rest of the value is really only a digital record like Bitcoin.

Governments track, back, trace and monitor the money supply and a world-wide community of interconnected banks prevent fraud, forgery, money laundering and misuse for illegal and underworld activities. 

There is potentially an unlimited supply of government currency; however, there will only ever be 21 million Bitcoins in play, and that may explain why this less liquid investment is driven more by a desire to get on board before it continues going up.

But the truth is, what goes up can come down in dramatic fashion … and yes, may go up again. 

Although Bitcoins are getting most of the attention, there are over 1000 different cryptocurrencies out there.

And more are created every day in what are called initial coin offerings (ICOs). (And yes, some of these are scams, and some are also creating crypto-millionaires.)

Bitcoins are simply a string of digital characters recorded on a giant, secure (so far) digital ledger. Blockchain is the digital and decentralized ledger behind Bitcoin and most other cryptocurrencies.

This ledger tracks your purchases, trades, sales of Bitcoin and transfers to someone else through the purchase of regular currency, other cryptocurrencies or goods and services.

Initially the criticism of Bitcoin (and value to some) was it could be used for illegal purposes (mostly drug trafficking) because it couldn’t be tracked.

It now is being forced to come into the mainstream and comply with international anti-money laundering regulations and the taxation codes of various countries including Canada and the United States. 

One appeal of Bitcoin is that the price is not controlled by large financial institutions such as banks, insurance companies, large investment pools and mutual funds.

Large financial institutions frequently use programs or computer-generated trading that affect stock market prices, effectively leaving the individual investor on the sidelines.

The Food Blockchain

A side note on blockchain technology, a Chinese e-commerce company recently announced plans to start using a blockchain platform to track beef imports from an Australian meat supplier.

It should give Chinese meat buyers more transparency into the beef production process by making it traceable on a blockchain. Information will include where the livestock was bred and raised, where the meat was processed, and how it was transported.

Walmart and IBM are also working to find ways to use blockchain technology to improve food safety and transparency across the food supply chain.

Bitcoin Begins to Move into the Mainstream Market

Bitcoin and cryptocurrencies have exhibited substantial volatility, which should indicate this is not an investment path for the faint of heart.

However, some of the large financial institutions are trying to participate in the cryptocurrency markets.

Both the Chicago Board Options Exchange and the Chicago Mercantile Exchange have started Bitcoin futures markets, which some experts think might reduce the volatility of the instrument.

Merrill Lynch, a large United States brokerage house, however, announced it will not deal with these instruments because it thinks they are too speculative.

One of the hyped benefits of cryptocurrency is its relative security.

Although Bitcoin hasn’t reported any breach, Coincheck.Inc of Tokyo has announced it was hacked and a competitive currency has lost almost half a billion U.S. dollars from its customers’ accounts.

Once again, this reinforces the need to update your passwords regularly.

Governments with pressure from banks and major investment firms/bankers, particularly in the U.S., have already started to rein in the Bitcoin system and some banks are starting to use the same “blockchain” technology to compete with Bitcoin (for a fee of course).

The Taxation of Bitcoin

CRA sees cryptocurrency as a commodity (not a government-issued currency) and if it is used to pay for goods and services, it is treated as a barter transaction.

Simply put, currency doesn’t exist in the transfer of goods and services but a barter transaction can result in the following:

  • Income or expense treatment
  • Acquisition or transfer of capital, inventory or personal use property

All these will have an impact on taxes.

Essentially, it means the vendor must include in income the fair market value in Canadian dollars of the goods or services sold for cryptocurrency.

Similarly, the purchaser using cryptocurrency in a business transaction must also reflect the value of the cryptocurrency used in the deal in their tax filings.

Any gain or loss arising on the disposition of the cryptocurrency can be considered business income or a capital gain or loss and depends on the circumstances of the transaction.

Although cryptocurrencies are not considered Canadian securities, there are capital and income taxation implications to their acquisition and active trading.

With the mighty swings in Bitcoin values, admittedly some people have invested hoping for some long-term appreciation in value. Better to have bought in at $10 to $1,000 than peak prices near $20,000.

Trading or Investing?

If one is not in the business of trading Bitcoin but hoping for his or her ship to come in, any success will be treated as a capital gain.

If the taxpayer is in the business of trading cryptocurrency (and CRA will make the determination) then gains will be treated as income.

There are other tax implications and uses of Bitcoins. You can donate them and they do fall under the charitable donation tax credit of the Income Tax Act as long as the recipient is a qualified charitable institution.

The value of the donation is the fair market value of the cryptocurrency at the time of donation.

GST/HST according to CRA also applies to cryptocurrency transactions. The vendor must collect and remit HST/GST on the transaction if it is commercial in nature.

"If all the economists were laid end to end, they’d never reach a conclusion." — George Bernard Shaw