This post was authored by our former lawyer, June Wright. Copyright 2014 Nelligan O'Brien Payne.
Bitcoins have taken center stage in recent years as a new form of online currency. Originally associated with illicit sales of contraband on the ‘deep web,’ Bitcoins have gained legitimacy in recent times as a form of valid currency. Bitcoins are generated by computers solving a complex mathematical algorithm to produce a single ‘coin.’ Just like any other currency, a Bitcoin is ascribed a value based on its perceived worth. The first recorded Bitcoin transaction was 10,000 Bitcoins for two large pizzas. Bitcoins have experienced massive fluctuations in value, which makes their reliability as a currency somewhat suspect.
The Canada Revenue Agency ("CRA") agrees with this, and has put out a policy guidance which classifies Bitcoins as commodities, rather than currency. They will be considered a commodity for purposes of the Income Tax Act. This means any arrangement involving Bitcoins will be deemed a ‘barter transaction.’ The value of the two goods exchanged will be deemed to be equal for tax purposes.
As an example, a transaction where a book worth $20 that is exchanged for 1 Bitcoin will result in the transaction being ascribed a value of $20 for income tax purposes. This is regardless of the fact that a Bitcoin’s value on the online exchanges is likely worth much more.
This situation changes when dealing with GST/HST for a sale. The CRA has determined that when a good is sold for an amount of Bitcoins, the GST/HST registrant will be required to calculate the current fair market value (‘FMV’) of the Bitcoins at the time of the sale and remit that amount to the government. Again, this rationale stems from the fact that Bitcoins are not classified as a currency but a commodity.
This logic remains in place when dealing with charitable donations of Bitcoins. The value of a tax receipt from a qualified donnee or registered charity will be whatever the fair market value of the Bitcoin was at the time of transaction. Some food for thought, the rapid fluctuation of Bitcoin FMV could be of some concern for the CRA with respect to charitable donation abuse.
Finally, the CRA has provided some guidance for the tax implications of buying and selling Bitcoins as a commodity. The tax considerations will differ depending on whether the loss or gain is one of capital, or of income. If it is defined as capital, the tax payer will be required to pay tax on 50% of the capital gain. If it is defined as income, it will be treated like the sale of any other commodity.
Given the general instability of Bitcoins, as seen in the 4.5% overnight drop as a result of the Mt. Gox Bitcoin exchange crash, it is unlikely the CRA will classify it as a currency in the near future. That being said, there is a growing acceptance of digital currencies across the world. A Bitcoin ATM was installed in Ottawa’s downtown Byward Market, and the Jamaican bobsled team raised funds to compete at the Sochi Olympics through the use of Dogecoins, a cheaper, newer, digital currency. Whether digital currencies have any staying power remains to be seen, but for now they’re on everyone’s mind.