Is Bitcoin taxable in Canada?

Bitcoins and other cryptocurrencies such as Litecoin, Dogecoin and Ethereum are attracting more attention from the media and from Canadian taxpayers. Due to their nature Bitcoins are in use throughout various jurisdictions, however, not all countries treat Bitcoins in the same way when it comes to income taxation. If you have concerns about how you should be reporting income you have earned in Bitcoins, or how to report profits on the sale of Bitcoins, you should seek the advice of one of our experienced Canadian Tax Lawyers to avoid future problems with the Canada Revenue Agency (“CRA”).

CRA & Bitcoin Taxation in Canada – Is Bitcoin Taxable?

The CRA has not yet addressed the issue of Bitcoin tax in any of its Information Circulars or Interpretation Bulletins. However the CRA has issued Income Tax Rulings and Technical Interpretation to address the tax treatment of transactions involving Bitcoins.

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In a response to recent medical enquiry about the tax treatment of Bitcoins, the Income Tax Rulings Directorate issue comments on good and services exchanges involving Bitcoins. In a March 2014 Technical Interpretation, the CRA provided some guidance and outlined its position regarding the income arising from Bitcoins activities. The CRA’s position is that when a taxpayer pays for a product with Bitcoins, the CRA will deem that transaction to be a barter transaction. When a taxpayer disposes of Bitcoins, they will be subject to taxation as either an income from a business source or as capital gains from disposition of property. Whether the gain is on income or capital account will depend on whether the taxpayer’s activities involving Bitcoins have sufficient commercial nature, as per the test in Stewart v the Queen, 2002 SCC 46.

Bitcoins as Barter Transactions

To get a better idea how the barter transaction would be taxed with a Bitcoin used as currency, one needs to have a basic understanding of how a more traditional barter transaction works. In a barter scenario, when a taxpayer pays for goods or services using Bitcoins, they will need to include the fair market value of the goods that they receive into their income when they file their tax return. This is to ensure that the full value of the goods or services received are accounted for in the taxpayer’s income.

As an example, say a Taxpayer who owns a retail store purchases a product with a fair market value of $20. The store owner pays for the product with say one Bitcoin having a value of $20. Because Bitcoins are not official currency, in order to ensure that the entire value sold to the consumer purchaser through the transaction is accounted for when determining the store taxpayer’s income for the year, the value of the product, $20, not the value of the Bitcoin when the goods are sold, is used for tax purposes.

Bitcoins as Income or Capital

Taxpayers who speculate in Bitcoins by buying and selling them using conventional currency will find that the income tax treatment is different than in a barter transaction scenario. Should a taxpayer choose to purchase and sell Bitcoins with an eye to making a profit, different rules apply.

Essentially, Bitcoins can be thought of the same way as any other piece of property, when they are disposed of for a price higher than what was paid, a capital gain will arise, and one half of the gain will be included in the taxpayer’s income.

This type of transaction done many times over the taxation year could lead to further complications. For example, if a taxpayer repeatedly purchases and sells Bitcoins for a profit, the CRA may choose to assess the taxpayer as being in the business of speculating on Bitcoins, and include all profits in the taxpayer’s income as business income instead of a capital gain.