Bitcoin and Income Tax: Canada
January 5, 2018
Bitcoin, the digital currency first launched in 2009, continues to make the news after its recent explosion in value. After starting last year at below $1,000, Bitcoin reached a value of almost $20,000 in December 2017, and was worth approximately $300 billion in real money.
While prices have cooled in the weeks since Bitcoin hit its peak, certain experts predict that the cryptocurrency will continue to grow in popularity. Some have said that Bitcoin will be worth $1 million by 2020. Others say that its market value could eventually match that of gold (which is $9.7 trillion, or approximately $460,000 per Bitcoin).
Still others are skeptical, warning of the possibility that its value could continue to plummet, either because major players like the U.S. or China could ban the technology, or if a superior blockchain technology supercedes it.
In the midst of all this debate and speculation lie a very real question. For those Canadians who invested in Bitcoin, how will this investment impact their taxes?
The Canada Revenue Agency on Bitcoin
The Canada Revenue Agency (CRA) has officially commented on Bitcoin, noting that where it (or any other digital currency) is used to pay for goods or services, the tax rules for barter transactions apply.
In addition, because Bitcoin can be bought or sold like any other commodity, any resulting gains or losses borne by the buyer or seller could be considered taxable income or capital.
Barter and Trade Transactions and Bitcoin
The CRA’s barter transaction rules date back to the 1980’s when the Agency first acknowledged “computer-controlled systems of commerce” and noted that these fell under the purview of the Income Tax Act. Under these rules, individuals must declare any income received or expenses made, regardless of whether any actual money was involved in the transaction.
The CRA provided two examples: a dentist or plumber who agreed to fix a patient’s teeth or customer’s pipes in return for services provided by that patient or plumber. Such transactions would still have to reported in the form of the typical dollar amount the dentist or plumber would have otherwise charged for their services. Analogously, if that dentist or plumber was today accepting Bitcoin as payment for their services, that transaction would similarly have to be reported in much the same way (i.e. the typical dollar amount that would otherwise have been charged).
Determining Capital Gains from Bitcoin
If you purchase, hold, and/or sell Bitcoin (or any other virtual currency), and ultimately make a profit (as was the case with many at the height of the Bitcoin frenzy in late 2017), that profit must be claimed as capital gains.
That is, if you bought 100 Bitcoins for $100,000 at the outset of last year when one Bitcoin was worth $1000, and sold them in December for $2,000,000 when Bitcoin reached its apex of $20,000, you would have to declare a capital gain of $1,900,000.
If you have questions about how investing in Bitcoin or other emerging currencies will affect your current tax plan contact Feigenbaum Law. We are leaders in the field of tax law, and offer services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.