By Sean Cooper
Digital currency — the most common being Bitcoin — must be reported on your tax return. Bitcoin has only been around for short while, and it has already reshaped the way we make everyday purchases. With Bitcoin ATMs appearing at malls across the country (and Starbucks now accepting it as payment!), the currency has made its way into the mainstream. With the meteoric rise in the popularity of Bitcoin, it should come as no surprise the Canada Revenue Agency is cracking down on those who don’t report their Bitcoin business dealings.
What is Digital Currency?
Similar to paper currency and coins, digital currency, such as Bitcoin (the largest in the field) and Ripple (a payment system, remittance network and currency exchange that’s the second biggest), is legal tender. Digital currency is commonly referred to as virtual money because it only exists on the Internet. Just like credit and debt, digital currency is another method of payment you can use to buy goods and services. Bitcoin is the most popular form of digital currency available today. Digital currency falls outside the realm of central banks; you can trade it without revealing your identity. Digital currency like Bitcoin can be exchanged for real money or can be transferred to other people.
Income Tax on Digital Currency
It wasn’t until Bitcoin went mainstream that the CRA started cracking down on digital currency. When you make a purchase with digital currency, you’re participating in a barter transition. A barter transaction is when you trade goods or services with someone else without the use of money. For example, when you purchase a coffee with Bitcoin, it’s considered a barter transaction. The CRA requires you to include the value of your purchase in Canadian dollars as part your income when you file your tax return.
Digital currency can sometimes be treated as actual income, since, as mentioned, they can be used to pay for physical goods and services in real life, and can also be exchanged for real money. As such, gains or losses from digital currency could be considered taxable and must be included on your tax return.
Reporting Digital Currency
Failing to report digital currency is a serious offense. The CRA considers it a form of tax evasion. The CRA is always on the lookout for those who don’t pay their fair share of taxes. This ensures the tax system stays a level playing field for everyone.
Bitcoins and Taxes
As the most widely traded digital currency, the CRA took aim at Bitcoin in a 2013 tax bulletin, IT-479R, Transactions in Securities. Depending on how you use Bitcoin, a deal could be viewed as a taxable gain or income or capital. As Bitcoin becomes more readily available, more brick and mortar retailers are starting to accept it as legal tender. Starbucks is the latest in a string of retailers to start accepting Bitcoin.
Here are a couple examples to illustrate on how Bitcoin is treated by the taxman. If you buy a latte at Starbucks for two Bitcoins, those two Bitcoins are treated as a taxable gain and must be reported on your tax return. The CRA considers this a barter transaction; the barter rules mentioned above apply in this situation since you were able to buy something tangible without using real cash.
If instead of making a purchase you trade in your Bitcoins for Canadian dollars, you must report any profit or loss as income or capital on your tax return. The CRA discusses the difference between income and capital gains in its bulletin, IT-479R, Transactions in Securities.
References & Resources
- Canada Revenue Agency: What You Should Know about Digital Currency
- Advisor.ca: What to do with Digital Currency
- CBC News: Bitcoins Aren’t Tax Exempt, Revenue Canada Says
About the Author
Sean Cooper is a financial journalist and personal finance expert. His areas of expertise include real estate, mortgages, pensions and retirement. His articles have been featured in major publications, including the Toronto Star, the Globe and Mail, MoneySense and RateSupermarket.ca.