Tax Implications of Using Bitcoins in Canada

With Bitcoins being all the rage right now, we thought we'd briefly discuss the tax implications...  

and potential pitfalls of buying, holding and using Bitcoins.

A recent article noted that Canada has more Bitcoin ATMs than any other country in the world.  We thought now was a good time to go over the tax implications associated with Bitcoins since the volume of individuals purchasing and using Bitcoins on a daily basis will only increase from here on in.

As you'd expect, since digital currency is somewhat of a new phenomenon, that tax authorities worldwide are trying to catch up and pass legislation so that they don't miss their piece of the action.

Here in Canada there already exists some guidance on the tax implications of Bitcoins, but since things move fast in the digital world, be sure to always be on the up and up by reading the latest literature on the Canada Revenue Agency's (CRA) website and speaking to authorities on the matter.

Tax Implications and Commentary

Selling Goods/Services for Bitcoins:

When a digital currency is used to pay for goods or services, the CRA deems that a barter transaction has occurred.  In a barter transaction, the value of the goods or services exchanged are included in the seller's income.

For example, if Person A sold Person B an Apple iPad, Person A would then declare the value of that iPad in his/her income.  Person A would have to determine this value based on what the value of the iPad is on the open market, which is a pretty simple exercise.

GST/HST:

In a scenario where a GST/HST registrant made the sale of the service or good, the sale is subject to GST/HST.  The registrant will be required to collect the GST/HST calculated on the fair market value of the Bitcoins at the time of sale.

Going back to our previous example, if Person A determines that the iPad was worth $500 and Person A has registered for GST/HST in the past, then they will have to collect the GST or HST on that $500 and remit it to the CRA when they file their GST/HST return.

Buying and Selling Bitcoins:

Instead of selling goods/services for Bitcoins, you may be involved in purchasing Bitcoins at one value and then "flipping" them at a later date for a higher value - similar to buying and selling shares on a stock market.

In this scenario, you are either making the sales on the account of income or capital.  Determining whether such a transaction is capital or income can only be determined by understanding all of the taxpayer's circumstances.  Without getting too technical, if your transactions are infrequent or if you were involved in a one-time transaction, then your sale may be on account of capital.  If that's the case, the related gain is treated as a capital gain.  In a capital gain situation, only half the gain is included in your income.

If buying and selling Bitcoins is something you are involved in on a more frequent basis, your sales me be on account of income, in which case, the resulting gains are fully included in your income.

Final Thoughts

Since Bitcoins are not controlled by Central Banks and in many cases can be traded anonymously, it is your responsibility to know the facts and voluntarily report the Bitcoin sales you made on your income tax return.  And before doing so, please consult with an accountant to get their take on when and how to report your Bitcoin transactions, since you want to ensure that you are not underpaying or overpaying on your tax return.