Business Income, CRA & Revenu Québec, Income & Investments

Bitcoin Explained with Your Tax Implications

Since Bitcoin was introduced back in 2009, Bitcoin has been growing in popularity over the past few years. Many different types of markets are accepting it as a means of “currency”. Stores advertising they accept Bitcoin, there are Bitcoin ATMs and big investors are also taking notice. It’s definitely come a long way.

As it gained popularity, governments had to take steps to get their fair share of it, as more and more people invested in it.

What is Bitcoin currency?

  • Each Bitcoin has its own unique encryption. Mined (Self- Employment Income) or traded (Investment/stock). It is always traceable but anonymously.
  • There are 21,000 000 (21 million) Bitcoins in circulation that can be mined/traded through a variety of mining companies. This is not controlled by any specific entity which is what is perceived as its most valuable characteristic.
  • It’s a crypto/digital currency, (meaning it’s a virtual currency that has its own wallet tracing, everywhere the currency is going within a block or blockchain ledger).
  • You trade it online with an account which holds your wallet. There are currently thousands of different “types” of Bitcoin on the market. Nevertheless no matter who or where you bought it from, if it’s traded or mined, it is considered a taxable source.
  • When comparing it to gold, the difference is that bitcoin is not touchable, it’s virtual. Unlike a stock you are trading, it’s strictly an online currency.
  • If you are mining it, there are different tax implications; if you spend a lot of time mining then you would have to claim it as a small business/ self-employment. CRA expects you to claim your Bitcoin as income converting its value to CDN$.

Bitcoin is not controlled by any bank, therefore allows them to be skeptical of this virtual coin. But at the end of the day, it truly falls on the laps of the traders/miners.  If you choose to go down a road of investing your hard earned cash into any market, always do your homework first.

The network keeps records of each bitcoin they have given the miners, and bundle them together with others in the same period of mining and that is called a block. When you bundle blocks together into bigger chains then they are called blockchains. This allows markets to keep track of the crypto/digital currency, full disclosure but you remain anonymous as your identity is encrypted in the mined coin. The amount of time you spend on trading the bitcoin will determine where you need to claim them on your taxes.

Because cryptocurrency is gaining more and more popularity, you should understand that there are varying factors that must be considered. One being the value of the Bitcoin, it is a high risk factor to be investing in it, just like any other highly traded commodity.  Be aware of the newest trends or advice on Bitcoin through reputable sources. Pay attention to the market and beware that there may be some huge tax implications if you haven’t done your homework.

As the government has come up with taxation rules, as well as calculation, which will allow Bitcoin miners or traders to be fairly taxed on the ever growing rate of the Bitcoin.  Example:  You have 8 Bitcoins, which as of writing this article, would be valued at $65,139.34 x 8 = $521,114.72, this means, you will have to pay tax on that $260,557.36. This is where it gets tricky, because some own only .02 of a Bitcoin, so it is taxed accordingly. So .02 x $65,139.34 = $3,257 worth of shares. Significant difference, right?

Mined versus Traded:

  • If you are trading a Bitcoin for the purpose of investment, you are treating that as a capital gain under stocks, just like buying gold. Capital Gain schedule 3 – Part 3 – Publicly traded shares entry. Taxed at half rates. The amount of tax paid will depend on your tax rate and level of income.
  • If you are mining Bitcoin, you are creating a token or coin to be sold on a specific platform using complex math equations, if you crack that code you get paid. The CRA considers this as revenue. You are working to make a Bitcoin and you gain a payment for mining it. The CRA expects their cut. T2125 Statement of Business or Professional Activity form using – Business Services Industry Code  – Data processing, hosting, and related services – 518210.

If you are mining Bitcoin, the CRA expects you to claim it as earned as revenue. And claim it on your taxes as self-employment/small business because if you are mining you are doing it out of your home. You will use the T2125 form. Keep ALL receipts or anything related to the mining of that Bitcoin, in case the government decides to ask for it later.

There are also tax implications if you have your Bitcoin in a foreign currency, you will have to claim it as foreign income, converted to CDN $.

If you are trading it, the CRA considers that a business capital gain or loss Section 3 – Publicly traded shares of Schedule 3.

For Quebec residents, please review the following link from Revenu Quebec for details on how to claim this virtual currency on your provincial return.

How much should you claim on your taxes?

You buy the Bitcoin for a price, when you exchange it for currency, you have to pay taxes on that currency. Other words it’s the gain on the withdrawal of the Bitcoin that is required to be taxes, works the same if you claim your losses.

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