Canadian Taxability of Bitcoin

Is Bitcoin Taxable? 

Disclaimer: all information provided is meant for discussion, education or opinion purposes only and is not intended as professional advice.

With the explosion in Bitcoin and other cryptocurrency prices throughout the last year and its evolution towards wider adoption, speculation and legitimacy, people want to know: Is Bitcoin taxable?

The short answer is...yes. Sorry, but yes.

Bitcoin is definitely taxable in Canada. I'm not addressing other jurisdictions in this post. Frankly, I'm surprised that anybody thinks that profitable activity would be ignored by any government without trying to get their cut. Also, I'm just going to refer to Bitcoin as a catch all phrase for cryptocurrency throughout this post. There is also a distinction to be drawn between the Bitcoin enthusiast class that believes in it as a separate currency and the investor class that wants it to go up and trade it back to a traditional currency, this post is meant for both.

Recently I've heard several off the cuff arguments about Bitcoin, usually with an eye to justifying these activities as tax free. I'm a fan of conservatively aggressive tax strategizing in general, but a simple Google search shows that there's not much grey area around these items and there hasn't been since at least 2014. That being said, it can certainly get confusing.

What's interesting is, although the concept of Bitcoin may be new, current laws have been written broadly enough to be applied to the key transactions with reasonably minor interpretations by the Canada Revenue Agency (CRA). Feel free to make another interpretation if you want, but be ready to defend it in Tax Court if you feel strongly enough about it. All I'm saying is no new laws have been or have to be written from CRA's perspective, so don't think you are ahead of them as they seem to consider the matter addressed.

Step one to understanding your obligations is considering which of these you are doing:
• Engaging in a hobby
• Running a business
• Making investments

For the record, saying this is a hobby won't save you from tax. Any profit on personal property sales is also taxable, although losses have no tax deductibility and the proceeds on a sale have to be both over original cost and over $1,000 for this to potentially apply. I also think it would be a hard sell these days that you are mining bitcoins for fun and not for profit.

Running a business means that your costs will be tax deductible but your profit will be taxed as business income, although in a corporation in Manitoba the rate may only be 10% in 2018.

If you buy and hold Bitcoin for the increase in value, meaning you are investing, you will likely be subject to capital gains which means only half of your profit will be taxable and will need to be voluntarily reported on your tax return when you sell/trade the bitcoin.

Step two is what specific activities you are engaged in:
• Mining Bitcoin
• Buying, holding, and/or selling Bitcoin
• Spending Bitcoin to buy goods or services

Bitcoin mining

If you are mining, your Bitcoins are considered a commodity, which puts them in the same categories as metal and timber. If you disagree, blame whoever used the word mining. In these types of activities, your direct input costs (electricity, labour, etc.) become part of your inventory cost for each Bitcoin you receive.

The inventory has to be valued under an accepted valuation method, usually the lesser of cost or fair market value. Unless you love spending money to lose money I'm going to assume these will be recorded at your cost.

The good news is that mining alone won't generate a taxable event, it's only when you convert this Bitcoin into something else (cash, goods, services, other cryptocurrency, investments, fast cars etc.) that it becomes taxable. The value of what you received for the coin becomes revenue and the inventory cost of the Bitcoin becomes an expense and you or tax on the difference. I feel it would be hard to argue that a modern Bitcoin mining appreciation would be considered anything other than a business activity.

Buying and selling bitcoins

If you are engaged in buying and selling Bitcoins the treatment will be treated the same as securities type transactions, which puts you in the same group as stocks and bonds for tax purposes.

On the upside, what you pay for a Bitcoin, including any commissions or other fees, become the Adjusted Cost Base (ACB) of the coin.

When you sell the coin or trade it for something else, the value of what you received, less any fees, becomes the proceeds of disposition. The difference between the proceeds and ACB becomes a capital gain in most cases.

Please note that you will be subject to similar scrutiny as a day trader, which means that either through volume or knowledge you could be considered to be in the business of trading Bitcoin and therefore your profit will be business income and subject to tax on the full amount.

Using Bitcoin to pay for things

Since Bitcoin is not a traditional currency, CRA has determined that any non-cash commercial transactions involving Bitcoin fall under the rules for Barter transactions. Basically, the value of the transaction is determined to be the more readily measurable between what your get and what you have up. Since Bitcoin markets are all over the place and highly volatile, what your received would probably be the most readily identifiable.

To illustrate, if I have a Bitcoin with a cost of $8,000 and I use it to buy a car with a $22,000 price tag, I am considered to have sold the coin for $22,000, regardless of market price of the coin. Under this scenario there would be tax to pay on $14,000 of profit ($22,000 - $8,000). Whether this would be considered business income or a capital gain would come back to the previous point about whether your mining/trading activities are considered business or investment in nature.

You could argue that the coin market price is a better measure, let's say the coin was worth $20,000 at that time. If this is the case you could argue that the car price was discounted and you would now have a $12,000 profit on the coin ($20,000 - $8,000).

Other issues

I have heard the argument that this should be considered a windfall, and therefore tax free. I have trouble with this myself, as a windfall generally requires no true expectation of profit like gambling, an inheritance or life insurance. If you inherit a Bitcoin, sure I would agree. If you are deliberately engaging in commercial or investment activity, expect to pay tax.

Another comment is "how would they know"? Referring of course to how CRA can track you. I would recommend stepping back and realizing that saying "it's not felony tax evasion if I don't get caught" is right up there with "no body, no murder". Besides, at some point you will want to convert this into goods or other currency so you can buy the finer things in life, so the paper trail will potentially begin. Don't underestimate the power of the CRA auditor to take one look at your car or home, look at your tax return, and ask how you could possibly afford it.

Stay honest, stay within the law, and stay out of jail. There's some good guidance from the Canadian government as to their perspective on digital currencies. In addition, CRA has a summary of their opinions on digital currency.

Author: Michael Glazier is a Chartered Professional Accountant and legacy Chartered Accountant providing a range of accounting and tax services to his local Winnipeg area and remotely to clients across Canada. He has over 12 years of experience in personal income tax, corporate income tax, assurance and various specializations and experience in accounting and tax issues around R & D, investments, projections, valuations and paperless transition. You can find out more by visiting the Glazier CPA website or by emailing at mglazier@glaziercpa.ca.