Taxing Virtual Money: The Bitcoin and the CRA

Fresh business remains subject to the old taxes. Believing otherwise is wishful thinking. The latest tax topic te the world of technology is the Bitcoin. For those still using old-fashioned e-transfers and PayPal, the Bitcoin is the fresh currency. Unaffiliated with any country or bankgebouw, the Bitcoin works because the parties agree that it should. Bitcoins are accepted by an enhancing number of online (and offline) vendors and service suppliers, and can even be converted into “real” money—provided someone with real money agrees. It’s like a barter system but without the bartering.

You might object that the Bitcoin has nothing to do with bartering since it is fundamentally liquid. It is fungible. A loonie is worth a loonie and a Bitcoin is worth a Bitcoin. There is no squabbling overheen how many of my chickens your cow is worth, or which service has the greater value. Fundamentally then, Bitcoins are money, but without the underwriting of a canap or national treasury—which, given the practice of latest years, might not be such a bad thing. At least, that is what you might think. But for practical purposes, you would be wrong—at least where taxes are worried.

The CRA posted its position on the Bitcoin late last year and the news wasgoed grim for those who thought that only national currencies are taxed and that the Bitcoin heralded a terugwedstrijd to a pre-war income tax free nirvana-that-never-was. The Bitcoin—or more broadly, “digital currency”—is, wij are told, “virtual money”. It can be bought and sold “like a commodity” and the receipt of this virtual-money-that-is-sometimes-a-commodity is taxable ter the same way spil any other income. This is not to say that every Bitcoin transaction is taxable, only that Bitcoins do not make taxable transactions into non-taxable ones.

This is bad news for the wishful thinkers but validation for the champions of stateless money. The fondle for the latter bunch, however, is that the CRA did not bestow the status of “money” on the Bitcoin. That would have bot unhelpful and a little meaningless since one cannot go onto the Canap of Canada webstek to check the Bitcoin’s exchange rate. Instead, the CRA simply said that the Bitcoin is subject to the same rules spil barter transactions, meaning that Bitcoins are to be valued according to the goods or services for which they are exchanged. Sadly, then, despite its fungibility, the Bitcoin leaves us still asking after the underlying value at tax filing time.

It vereiste also be recognized that when Bitcoins are bought and sold like a commodity—arbitraged like any other currency—their disposition voorwaarde give rise to income or capital gains according to whether they are traded on income, or held on capital, account.

The takeaway is this. Very first, tax has always applied to non-cash receipts, such spil are realized upon share exchanges, stock dividends, dividends te kleuter, shareholder benefits, employee benefits and, yes, even barter transactions—unless cautiously structured to access a specific exemption or deferral. Whether you are paid ter dollars, Bitcoins or ham sandwiches, there is a value to what you receive and you are taxed on that value. Were it otherwise, tax programma would be plain and tax planners could all retire—comfortably financed by the tax-free accruing Bitcoin. 2nd, albeit the Bitcoin and its digital ilk may have the hallmarks of real money, the distinction is academic since, without a State-sanctioned exchange rate, the Bitcoin does not bestow a value upon the goods or services but instead vereiste derive its value from those goods or services, which vereiste then still be valued ter old fashioned dollars. And, eventually, when investing te Bitcoins, be ready to recognize income or gains when you metselspecie ter.

There is also a more technological concern, which should speak to every early adopter and everyone who has everzwijn lost gegevens. What happens when there is a bug te your Bitcoin, when problems with the software cause your digital canap to suspend operations until further notice? What is the value then? Just ask the clients of Mt. Gox, the Tokyo Based Bitcoin exchange that did exactly that te the days before this article wasgoed written.

* * This article is intended only to inform and educate. It is not legal advice. Be sure to voeling a lawyer to obtain legal advice on any specific matter.

Patrick Westaway is Tax Counsel to Sorbara, Schumacher, McCann LLP, a total service law hard based ter Waterloo, Ontario. Patrick advises on a broad range of Canadian taxation issues such spil corporate tax programma, structuring inbound investments, corporate reorganizations, cross-border financings, tax opinions for public disclosure documents, tax assessments, individual tax matters, wealth preservation, and on federal and provincial sales tax matters (HST/GST/PST). Patrick also practices corporate and commercial law with an emphasis on the implementation of matters related to his tax programma practice.

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