Bitcoin is one of many e-currency payment systems that is not operated by a centralized government authority like most other currencies. Popular for online payments and transfers due to its built-in encryption and security methods, Bitcoin has captured the attention of many non-traditionalists and tech-minded people. It has also captured the attention of the CRA, who has altered existing tax codes to help address profits and transactions associated with virtual currencies.
Trade and Barter Transactions With Virtual Currencies
Transactions made with bitcoins or other virtual currency are covered by the section of the tax code that governs barter and trade transactions.
Under this portion of the tax code, you must declare any income received or expenses made, regardless of whether any actual cash was tied to the transaction.
For example, if you run a daycare and you accept eggs, bitcoins or any other type of trade in exchange for child care, you still are required to report these transactions on your income taxes. Since you can’t declare bitcoins, eggs or other material items on your tax form, you must declare the typical dollar amount that you would have otherwise claimed for those services.
If you usually charge $200 per week for daycare services, you must declare $200 as income on your return — even if you accepted different types of payment. Similarly, the person who provided you with the trade may declare the $200 as an expense on their income tax return.
Using Virtual Currency for Your Business
In some cases, regular trade and barter rules do not apply.
However, if you use Bitcoin or other virtual currency systems in the operation of your business or self-employment activities, you are still responsible for claiming these purchases and payments as usual on your tax return.
To assign dollar amounts for these transactions, you must use the exchange rate between the virtual currency and the Canadian dollar on the day of the transaction.
For example, if you purchased inventory for your shop with Bitcoin and the cost was 1 bitcoin, you need to find the exchange rate for the day the purchase was made. If the exchange rate was $76,687.76 CDN, your deduction for that inventory purchase would be $76,687.76.
Similarly, if you paid an employee using Bitcoin, you would have to convert the payment to Canadian dollars using the exchange rate from the day the payment was made. Your employee would have to use the exchange rate to determine how much income to declare.
Determining Capital Gains From Virtual Currencies
If you buy, hold and sell virtual currency, and make a profit in the process, you must claim that profit as a capital gain.
The portion of the Canada Revenue Agency’s tax code regarding securities exchanges applies to these transactions.
For example, if you purchased 2 bitcoins for $150,000, but sold them six months later for $162,400, you would have to declare a capital gain of $12,400.
For Quebec residents, please review the following link from Revenu Quebec for details on how to claim this virtual currency on your provincial return (TP-1).