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Is Bitcoin Taxable in Canada? A Look into the Basics and More | David J. Rotfleisch

posted 3 years ago

 

Is bitcoin taxable in Canada? This might be the question you are asking yourself if you are thinking about using bitcoins to pay for services or if you are being paid with the cryptocurrency for work rendered. To understand more about bitcoin taxes in Canada, it might be best for you to know the basics of bitcoin first.

Bitcoin was first introduced in 2009 and its popularity has grown over the years. There are now a variety of markets that accept it as a “currency” and stores that have begun to advertise about accepting bitcoins as payments. You can even find Bitcoin ATMs where you can purchase the cryptocurrency. 

As a result of this fame, big investors began to take notice and governments were not far behind. To ensure that they get their fair share of the bacon, they took measures that led to the setting up of cryptocurrency taxes. These taxes need to be paid whenever you use bitcoins, regardless of whether you are mining bitcoins, using the cryptocurrency to pay for products or services, or earning it as a form of wage. 

In the content that follows, we will provide you with more information about bitcoins, their treatment as a currency, the taxes you need to pay, and more.

The Basics of Bitcoin and Bitcoin Transactions

Bitcoin is a digital currency. Thereby, it works as a digital asset even as it serves as a medium of exchange. As with other cryptocurrencies like Litecoin and Ethereum, bitcoins rely on cryptography to ensure secure transactions. However, just like other cryptocurrencies, bitcoins have no physical form and do not provide owners with any rights to another cryptocurrency or property. If you are a new bitcoin user, then you’d need to install an application on your computer, tablet, or smartphone, which acts as a “bitcoin wallet”.

A bitcoin transaction does not depend on any third party for its security or creation, unlike the usual online transactions. Traditionally, a nation’s central bank is the one that creates currency. So, for online transactions, a bank or an online payment processor usually confirms or approves payments made online. Bitcoins, on the other hand, are created through data mining and depend on a peer-to-peer computer network for the verification of transactions, transfer of bitcoins, and double-dealing prevention. This means that there is no centralized authority that controls its system. 

Bitcoins are acquired in different ways and they are as follows:

  • Mining 

Bitcoin units are created through a process known as mining. It works with a person mining bitcoins through solving complicated mathematical problems and these, in turn, process transactions done using bitcoins and protect the bitcoin network. These complicated problems call for bitcoin miners to devote considerable computer resources to come up with solutions. So, essentially, bitcoin miners get bitcoins as a form of compensation for their contributions to the bitcoin system’s integrity.

  • As payment for goods or services
  • By purchasing via bitcoin exchange or the Bitcoin ATM

The two can happen when a person enters a bitcoin exchange on the Internet using a smartphone, tablet, or personal computer, or by using a Bitcoin ATM. Physically resembling the usual ATM, the Bitcoin ATM is connected to the Internet and lets users buy bitcoins using cash. The user deposits cash into the ATM and in exchange, it disburses a receipt that contains a unique code, which is entered into the bitcoin wallet to be recognized as newly-bought bitcoins. The user could also give this code to another person as payment for goods or services.

Does Canada See Bitcoin as Money?

So, if you can use bitcoins as payment for goods and services, you might be wondering if Canada sees it as money as well. At present, Canadian regulatory authorities consider digital currency like bitcoin and other cryptocurrencies as neither currency nor money. In a position paper released in 2014, the Bank of Canada concluded that bitcoin and other cryptocurrencies were unable to meet the description of money.

The Canada Revenue Agency (CRA) also released an interpretation letter in 2013, which declared that bitcoin and other digital currencies were not currency for tax purposes. However, the agency classified bitcoin as a commodity like oil or gold. So, it follows that the tax rules on barter arrangements also apply to transactions using bitcoins.

Tax Treatment of Bitcoin and Digital Currency for Income-Tax Purposes

As the CRA treats bitcoin and other cryptocurrencies like a commodity for income tax purposes, therefore any income from bitcoin transactions is considered as a capital gain or a business income, depending on the circumstances. So, if earnings can be classified as capital gain or business income, then any losses can also be seen as capital or business losses.

Because of this, taxpayers must establish if a bitcoin activity leads to capital or income because this will have an impact on the treatment of the revenue for income tax purposes. This means that not everyone who sells or buys bitcoins is engaging in business activities. 

When you use bitcoins to pay for services rendered or goods bought, the CRA sees this as a barter transaction for purposes of income tax. By definition, a barter transaction happens when an exchange of services or goods between two parties is carried out without the use of legal currency. 

You must always use a reasonable way in figuring out a bitcoin transaction value, especially when a direct value could not be confirmed. You must keep records that will show exactly how you came up with the value. The CRA’s position on this matter is that the fair market value is always the highest price that is expressed in a dollar amount agreed upon by both buyer and seller. 

If you have more than one cryptocurrency type in your digital wallet, then each type is seen as a separate digital asset and must be valued separately. So, if you have Bitcoins, then these should be given a separate value from your Litecoins.

The courts will look into a broad range of factors when they decide whether to consider a transaction’s loss or gain as an income or a capital. When applied to transactions using bitcoins, the inclusions of these factors are listed below: 

  • Ownership period – Usually, bitcoins are owned for only a short time.
  • Transaction frequency – This is either the fast turnover of properties or a history of considerable bitcoin buying and selling.
  • Bitcoin market knowledge – This pertains to a taxpayer’s experience or knowledge of bitcoin markets.
  • Time spent – This is when a huge part of a taxpayer’s time is used in studying bitcoin markets and investigating possible purchases.
  • Relationship to a taxpayer’s regular work – The courts will assess if transactions using bitcoins play a huge part in a taxpayer’s usual business.
  • Advertising – This pertains to the taxpayer’s methods in informing others of his willingness to buy bitcoins.
  • Financing – This is when a taxpayer bought bitcoins through some form of a loan. 

To better understand all these, it might be good if you will ask for help from a Canadian tax lawyer who can spell out the ins and outs of cryptocurrency taxes in Canada for you.

Additional Info About Using Bitcoin for Your Business

Usual rules for barter or trade do not apply.

If you use bitcoin or other cryptocurrency in your self-employment activities or business operations, you are responsible for claiming these payments and purchases on your tax returns.

Use the exchange rate between the Canadian dollar and the virtual currency on the transaction date to assign a dollar amount to any transaction.

If you bought inventory for your shop using bitcoin, you need to find the exchange rate for the date of purchase. In the same way that your employees would have to use the exchange rate from the date you paid them to establish how much income they’d have to declare.

Profit from buying, holding, and selling virtual currency must be claimed as capital gain or income.

The section on the CRA’s Tax Act pertaining to securities exchanges will apply to transactions such as these. It must be understood though that the tax treatment of cryptocurrency sales takes complex analysis and depends on the factors set out in the tax act. Failure to properly identify an income transaction and its wrongful report as a capital gain can lead to the payment of penalties or potential criminal prosecution, depending on the amount at issue.  

There is still so much you can learn about bitcoin taxes in Canada, especially if you are planning to continue doing bitcoin mining in the years to come. To make sure that you are covered when it comes to what taxes you need to pay, call +1 647-699-4535 to talk to an income tax lawyer now.

Did you know El Salvador was the first country that made bitcoin a legal tender? This occurred on June 9, 2021, and although the US dollar remains as the country’s primary currency, bitcoin can already be used for any transaction where it is accepted by a business.

Bitcoin, Digital Currency, and GST/HST

As mentioned above, the CRA considers bitcoins and other cryptocurrencies as commodities. So, if commercial providers of goods and services are paid using Bitcoins or Litecoins, they must collect Goods and Services Tax/Harmonized Sales Tax (GST/HST). The value of the goods and services bought or paid for in bitcoins is deemed as equivalent to the fair market value of bitcoins during the time of the supply. This is the basis for the GST/HST that must be collected.

Generally, the supply of financial services, which includes “the exchange, payment, issue, receipt, or transfer of money”, is exempt from GST/HST as stated in the Excise Tax Act. However, as the CRA does not consider bitcoin as money, they could insist that the exemption does not apply to the purchase of bitcoins. However, the CRA has yet to come out with official guidelines on the implications of GST/HST on bitcoin transactions. 

Warning Against Tax Scams

Now that you have a grasp on the basics of bitcoin taxes in Canada, then it is time to be aware of a new tax scam involving bitcoins. The modus operandi for this scam is that someone will pretend to be a CRA agent and call you. They’ll tell you that you owe a tax debt, which you must repay to escape prosecution. The scammer will then tell you to use bitcoins in paying your tax debt. They’ll direct you to the closest bitcoin exchange where you will be asked to exchange cash for bitcoins and then to deposit them into the scammer’s digital wallet, which of course, is anonymous.

Keep in mind that the CRA will never ask you to pay any tax debt in bitcoins. If you receive a suspicious call wherein the speaker claims to be from the Canada Revenue Agency, confirm its legitimacy first. Get hold of the CRA’s genuine phone number, call them, and inquire about the status of your account. If you do not want to contact the CRA yourself, then you can get the assistance of a tax lawyer or taxation specialist who can handle this for you.

Tax Tips for Bitcoin Transactions

Although Canadian regulatory authorities don’t consider bitcoins as real money if you get paid with the cryptocurrency for goods sold or services rendered, you may still need to pay cryptocurrency taxes. You may still need to report the bitcoin payment on your tax return as well as collect and remit GST/HST on behalf of the buyer. 

Always remember that while bitcoin transactions may be anonymous, this does not mean that you can hide this income from the government. Bitcoin exchanges may reveal their customer data to authorities and tax authorities may already have methods in place to crack down any cryptocurrency system. It has been alleged that the Internal Revenue Service has bought software that can reveal the identity of a bitcoin user. It is said that the software can analyze any bitcoin transaction and trace bitcoins as they go from one digital wallet to the next. The software’s designers claim that their program has already gotten information on 25% of bitcoin users, which account for an estimated 50% of all activities involving bitcoins.

So, if you were unable to fulfill your tax obligations from your bitcoin transactions, you may sign up for the Voluntary Disclosures Program. This program allows you to correct your taxes without being prosecuted or made to pay penalties to the CRA. 

Ask a Tax Lawyer About Cryptocurrency Taxes in Canada

To know if you qualify for the Voluntary Disclosures Program, it might help if you contact a tax lawyer and learn more about paying bitcoin taxes in Canada today. Even if you have not fully grasped the tax implications of getting into bitcoin and other cryptocurrencies on your own, there are tax lawyers in Toronto who could assist you. Visit taxpage.com or fill out their contact form for a free 10-minute consultation now.

 

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