The tax implications of Bitcoin and other digital currency
Unlike official currency, Bitcoins are not controlled by a central bank, or even by any specific country. They can be bought and sold in return for traditional currency and can be transferred between individuals. As a result, the Canada Revenue Agency (CRA) doesn’t consider them to be a foreign currency. Instead, Bitcoins and other digital currencies are viewed as a commodity (similar to oil or gold), where any gains or losses could be taxable income (or capital) for the taxpayer.
So now for the big question: Do you need to report this income on your tax return? “Yes!” says Lisa Gittens, Senior Tax Professional at H&R Block. “The CRA expects you to report these transactions as you would any other business or investment transaction. While banks do not have record of it, the CRA is well aware now of digital currency and is actively pursuing cases where they believe there is non-compliance with reporting income.”
Essentially, a person who sells something in exchange for Bitcoin is seen to have sold it for its fair market value at the time of the exchange.
Some things to keep in mind if you own or exchange digital currency:
To calculate the dollar value of a Bitcoin transaction, you must use the exchange rate for Bitcoin and the Canadian dollar on the day of the transaction.
If you use Bitcoin or other digital currency systems in the operation of your business or self-employment activities, you are still responsible for claiming these purchases and payments as usual on your tax return.
Any business accepting digital currency is considered engaging in a barter transaction. If the trade was a business transaction, this would be viewed as income to the business. If you trade for an item, the value of that item would be considered income. For example, if you accept digital currency for the sale of a book, then the value of the book would be the amount of income you would have to report.
If you buy, hold and sell digital currency outside of a business, and make a profit in the process, you must report that profit as a capital gains. The portion of the CRA’s tax code regarding securities exchanges applies to these transactions. For example, if you purchased 100 Bitcoins for $25,000, but sold them six months later for $32,000, you would have to declare a capital gain of $7,000. The exemption of $200 per year on capital gains from foreign currency transactions does not apply to Bitcoins.
Unlike foreign currencies, digital currencies cannot be held in an RRSP or other registered plan (since they are not qualified investments).
If you are holding Bitcoins with a Canadian dealer, they won’t be subject to the foreign property reporting rules. However, if you hold your coins with a U.S.-based or other foreign-based dealer, and they aren’t being held or used in carrying on a business, you’ll need to complete Form T1135 Foreign Income Verification Statement if the value of the Bitcoins is more than $100,000.
Should you have any questions about the tax implications of digital currency, H&R Block Tax Experts are always available to discuss these with you. For more information, visit one of H&R Block’s offices or online at www.hrblock.ca.