The Tax Treatment of Bitcoins by the CRA

Bitcoin in Canada

Bitcoins and other cryptocurrencies, like Avalanche, Solana, and Tether, are undeniably drawing attention as seen in the news and how the Canadian taxpayers became curious about them. The appreciation of the use of Bitcoins is present in various jurisdictions but not all treat such in the same way for income taxation purposes. Since the question of how you should report earnings from Bitcoins is important in ensuring compliance with the Canadian income tax system, experienced Canadian Tax Lawyers may help in giving the advice to ensure you will not depart from the rules imposed by the Canada Revenue Agency (“CRA”).

Bitcoin: What You Need to Know

Bitcoins are among the types of “cryptocurrency” – a virtual currency originated in 2009 from an anonymous computer programmer. Having been designed for anonymous exchanges, Bitcoin is confronted with issues concerning income tax, money laundering, and other illegal activities. Since its creation, there have been ups and downs in its valuation. Based on records, there are only two recorded plummets in the value of Bitcoins in the years 2011 and 2013. The latter incurred more than 50% lost in Bitcoin value in a single day.  The year 2022 again saw a major plunge in crypto currency values.

Three ways how to acquire Bitcoins:

• Through “mining” or the process of creating Bitcoin online using computers;
• Mining involves the setting up of dedicated computers by the user to run processes and solve algorithms to “discover” new coins based on the specifications of the currency upon its creation. Cryptocurrencies provide for a set of an upper number of coins available to miners until all are discovered and “mined out”. But these coins remain in circulation, used for the usual purchasing and trading.
• Through online purchase in exchange for traditional currency. 
• As payment for services.

While bitcoin transactions are clearly taxable, there are no definitive CRA rules clarifying the method of taxation as between capital gains and income, so there remains uncertainty as to the tax treatment of Bitcoins in Canada. The taxation and consequences may vary depending on how the user acquired the Bitcoins.

CRA on Bitcoin Taxation: Taxable or Not?

There have been no issuances or circulars yet from the CRA that fully discuss Bitcoin tax in Canada, except the Income Tax Rulings and Technical Interpretation which talks only about the taxability of Bitcoin transactions.

Based on the response of the Income Tax Rulings Directorate on the latest enquiry as to how Bitcoin should be treated in Canadian taxation, it only touches Bitcoins used in the exchanges of goods and services. What the CRA merely supplies is a guide and its position on the income derived from Bitcoin activities. For instance, if the taxpayer buys a product and uses Bitcoins as payment, that transaction is considered by CRA as a barter transaction. Or when a taxpayer sells Bitcoins, the income from that transaction shall be treated as either an income of a business or as capital gains from a property sale. To simplify, the basis for taxing Bitcoins whether from income or capital account shall be based on the taxpayer’s activities using such that are commercial in nature, which test of application is enunciated in the case of Stewart v. the Queen, 2002 SCC 46.

Bartering Bitcoins

If you are wondering how to tax a barter transaction using Bitcoins as currency, it is just like how traditional barter transactions operate. When bartering, a taxpayer uses Bitcoins to pay for goods or services and the fair market value of which shall be included in their income upon the filing of the tax return. This method helps ensure the inclusion of goods or services in full value in the declaration of a taxpayer’s income.

To visualize, let’s try this example. A retail store owner buys a product at a fair market value of $50, and instead of paying $50, the owner paid two Bitcoins valued at $25 each. For purposes of taxation, what will be accounted for to determine the taxpayer’s income for the year is the value of the product, which is $50, and not Bitcoin because it is not an official currency and the basis of computing. 

Income or Capital?

Those taxpayers who trade in Bitcoins and use traditional currency in buying and selling may see the difference in the tax treatment in income as against a barter exchange. But separate rules are applicable if the taxpayer trades Bitcoins for profit.

Bitcoins operate like the disposal of any other type of property, a capital gain arises if the selling price is higher than how much it was originally paid, and half of the capital gain is accounted for as part of the taxpayer’s income.

Although used many times over a transaction year, this transaction type might still cause confusion to taxpayers. Say for instance a taxpayer is into the acquisition and disposal of Bitcoins to earn more, the CRA may interpret the taxpayer’s activities as part of a business of speculating on Bitcoins and move for the inclusion of all profits as business income instead of gains in the taxpayer’s income.

Bitcoin Holding Reporting

The CRA made it clear that the Bitcoins held in and outside of Canada that are not actively used in business are “specified foreign property” as articulated in its Technical Interpretation in April 2015. Such articulation expounds on the yearly duty to report Bitcoins’ value in a T1135 Statement to CRA by a resident if the accumulated value of all “specified foreign property” exceeds $100,000 for tax purposes.

Also, the “specified foreign property” covers interest in a foreign partnership, and if non-resident members have shares of income or loss are more than 90% of the total partnership’s income/loss. And if such “specified foreign partnership” is Bitcoins which are held outside Canada without using them in the course of business, and a Canadian resident has an interest in that “specified foreign partnership”, the latter has the responsibility to report the Bitcoins value in a T1135 Statement for tax purposes.

Taxing of Bitcoins in Canada Remains Unclear

The rules laid down governing the tax treatment of Bitcoins might sound simple but in reality, are ambiguous.

Like in foreign currency transactions involving Bitcoins, what should be the rules to apply?

Despite the obscurities, it is still best not to fail in your reporting obligations as prudently advised by our professional Toronto income tax lawyers.

Legal Assistance from Canadian Tax Lawyers

Worry no more if you have concerns about the possible tax consequences of being a seller or miner of Canadian Bitcoins because we have Ontario Crypto Tax Lawyers to assist you. And a piece of advice if you have and not yet reported your Bitcoins holdings in Canada, better disclose these foreign assets holdings to the CRA through a voluntary disclosure prior to CRA contacting you. You may also plan effectively to ensure you will pay only the taxes due to you. These moves are essential along with getting expert legal Canadian income tax advice considering the complexity in the tax treatment of Bitcoins.