Bitcoins are a hot topic these days. And I must admit, I’m starting to get really excited about them and their future. Bitcoins are a completely decentralized digital currency that can be sent through the internet. The transfer of bitcoins happens on a peer to peer basis and there is no bank or country that controls them other than a rather complex system called cryptography. It all just seems so futuristic.
In fact, bitcoins have been so hot that they have literally doubled in value in recent months resulting in the cost of a bitcoin hovering around the $300 CDN mark at the time of this article.
Businesses accepting bitcoin payments on the rise
More and more websites have been starting to accept bitcoins as payments for goods and services. The list of sites are numerous, but some of the bigger ones include Wordpress, Reddit and OkCupid. In fact, China’s equivalent of Google, Baidu, started accepting bitcoin payments in mid October for some of its online security services. Needless to say, the bitcoin buzz is in full swing and online retailers and service providers around the world are not only taking notice, but are also incorporating bitcoins into their business models going forward. With its massive rise in popularity, it’s only a matter of time before more start doing the same.
Canada Revenue Agency issues fact sheet
When these types of things come on the scene and start to really gain some attention, you can be sure that the Canada Revenue Agency will be right there by its side to chime in on their tax implications.
But the issue of bitcoins presents a real dilemma for the CRA. As you can see from the above, the fact that it’s decentralized means that there is absolutely no government regulation surrounding the issuance and trail of bitcoin transactions. No doubt, the government is likely getting a bit nervous.
Just this week, the Canada Revenue Agency put out a brief fact sheet, entitled, “What you should know about digital currency” commenting on the tax implications of digital currencies specifically singling out bitcoins. Although brief, the fact sheet is interesting indeed. As expected, the CRA specifically states that digital currency transactions are taxable, but their classification and how to treat the transaction is what’s intriguing.
Bitcoins aren’t money
What caught my eye in the fact sheet is that the CRA equated bitcoins to a non-legal currency, and since the CRA stated that they are a non-legal currency, they likely had no other option but to classify any transition involving them as as a barter transaction.
Going even deeper into the CRA’s interpretation bulletin on barter transactions, the CRA defines a barter transaction as one that is, “effected when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money.” By categorizing bitcoin transactions as barter transactions and going according to their definition of a barter transaction, the CRA is essentially saying that bitcoins are not considered a form of money.
This is completely uncharted territory and with good reason, the CRA is appearing to have a difficult time defining a category to place bitcoins in. Whether the CRA likes it or not, bitcoins are a new form of currency. Look up any definition of currency on the web and they invariably all say the same thing, currency means a form of money.
If the popularity of bitcoins continue on this path, I personally think that it will be very difficult to continue calling bitcoins something that isn’t money as well as continuing to classify them as a barter transaction. For the time being however, this is the category that bitcoin transactions are placed in and the resulting rules must be followed.
Valuing the barter transaction for tax purposes
Another issue which comes to the light in the fact sheet is that of valuation of these bitcoin transactions. The CRA writes that when valuing a digital currency transaction, you must value the goods or services that were exchanged for the bitcoins. In their example, someone purchased a movie for bitcoins and in valuing the transaction, you would look at the value of the movie, not the value of the bitcoins. If you were the seller of this movie, then you must include the value of this movie in your income for tax purposes and as such, it becomes taxable.
Valuing a movie is easy but what about if you purchased a rare piece of art using bitcoins, how would this piece of art be valued? The art needs to be valued at its fair market value, not at the amount the buyer gave it bitcoins, which could be different and a market value is not always easily attainable. This is one of the biggest difficulties when attempting to value barter transactions. Sometimes valuation is straightforward, sometimes it’s not and this could present problems when trying to report these kinds of barter transactions as income.
Buying and selling bitcoins as an investment
Some of you interested bitcoiners out there might be interested in buying bitcoins for speculative purposes, in other words, to buy bitcoins and sell them when the price hopefully goes higher in order to make a profit. The CRA has commented on this as well and mentions that those buying and selling bitcoins will need to report their respective capital gain or loss on their tax return. So remember to keep note of the price you bought your bitcoins at as well as their sale price in order to calculate and report the correct gain or loss.
What does all this mean for you?
The government has a bit of a problem on its hands when it comes to bitcoin transactions. They are gaining steam and are quickly becoming one of the biggest talked about topics, especially in the tech community. It’s hard to predict the outcome for bitcoins, but if things continue on this pace, they will be difficult to ignore.
The major problem for the CRA is that they have little way of tracing bitcoin transactions since it’s so unregulated and decentralized. The fact that it’s international makes things even more difficult to control and track.
All of this to be said, the CRA is extremely smart and are likely investigating this quite vigorously. As a Canadian, what you need to know is that if you are receiving payment for goods or services with bitcoins, then you must value the goods or service that were sold and include that in your income for tax purposes. If you don’t, you run the risk of being assessed at some point in the future. Just follow the advice in this article as well as the guidance on the CRA’s fact sheet and you’ll be good to go.
Author: Ryan Lazanis, CPA, CA
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