There are a number of digital currencies with various characters, values and trading platforms. It’s important to find out how the Canada Revenue Agency treats these currencies and typical transactions involving digital currencies.
What Is a Digital Currency?
A digital currency is a form of virtual money or a medium of exchange that is electronic and can be used to buy and sell goods or services. There is no physical currency that you can hold in your hand; these are all virtual and online.
Common examples of digital currency include bitcoin, litecoin and dogecoin. All of these have slightly different characteristics, are not controlled by any central bank or country, and can generally be traded anonymously from one person to another. There are some ways to trace payments in bitcoins, but these are not very common and do require a little detective work to figure out who might have made a transaction.
The general principles behind these digital currencies often are that transactions are safe due to cryptography used to prevent double spending, counterfeiting or theft. They are anonymous and can pass across country borders and through governments without interference.
How Are They Taxed?
The CRA has ruled that there are essentially two ways that digital currency is taxed. If a digital currency is used to pay for a transaction, it should be treated as a barter arrangement; as such, the rules for barter transactions would apply. A barter transaction is deemed to have happened when two persons decide to exchange goods or services and carry out the exchange without using a legal currency, such as a Canadian dollar. A barter exchange usually happens with two parties dealing non-arm’s length agree to exchange goods or services. In the case of a digital currency, the value may be difficult to determine, but the good or services received should be the overriding value of the transaction. The seller of the good or service should report the proceeds of the sale, even if it is from a digital currency.
The second way in which digital currency is taxed is if it was bought and sold like a commodity, such as gold. If you are buying and selling a commodity, any gains or losses that occur during the transactions must be reported as taxable income. Depending on the nature of the transaction, they may be considered taxable income or capital for the taxpayer.
Many digital currencies are still rather new and have yet to receive widespread acceptance. As their popularity increases, however, so do the number of scandals involving them. For example, bitcoins have played a huge part in numerous large-scale thefts and large-value swings. These illegal activities even led one major bitcoin exchange, Mt. Gox, to close its operations and file for bankruptcy. In spite of these setbacks, more companies have continued to embrace accepting bitcoins as payment for goods and services.