New business remains subject to the old taxes. Believing
otherwise is wishful thinking. The latest tax topic in the world of
technology is the Bitcoin. For those still using old-fashioned
e-transfers and PayPal, the Bitcoin is the new currency.
Unaffiliated with any country or bank, the Bitcoin works because
the parties agree that it should. Bitcoins are accepted by an
increasing number of online (and even offline) vendors and service
suppliers, and can even be converted into "real"
money—provided someone with real money agrees. It's like
a barter system but without the bartering.
You might object that the Bitcoin has nothing to do with
bartering since it is fundamentally liquid. It is fungible. A
loonie is worth a loonie and a Bitcoin is worth a Bitcoin. There is
no squabbling over how many of my chickens your cow is worth, or
which service has the greater value. Fundamentally then, Bitcoins
are money, but without the underwriting of a bank or national
treasury—which, given the experience of recent years, might
not be such a bad thing. At least, that is what you might think.
But for practical purposes, you would be wrong—at least where
taxes are concerned.
The CRA posted its position on the Bitcoin late last year and
the news was grim for those who thought that only national
currencies are taxed and that the Bitcoin heralded a return to a
pre-war income tax free nirvana-that-never-was. The
Bitcoin—or more broadly, "digital
currency"—is, we are told, "virtual money". It
can be bought and sold "like a commodity" and the receipt
of this virtual-money-that-is-sometimes-a-commodity is taxable in
the same way as any other income. This is not to say that every
Bitcoin transaction is taxable, only that Bitcoins do not make
taxable transactions into non-taxable ones.
This is bad news for the wishful thinkers but validation for the
champions of stateless money. The rub for the latter bunch,
however, is that the CRA did not bestow the status of
"money" on the Bitcoin. That would have been unhelpful
and a little meaningless since one cannot go onto the Bank of
Canada website to check the Bitcoin's exchange rate. Instead,
the CRA simply said that the Bitcoin is subject to the same rules
as barter transactions, meaning that Bitcoins are to be valued
according to the goods or services for which they are exchanged.
Sadly, then, despite its fungibility, the Bitcoin leaves us still
asking after the underlying value at tax filing time.
It must also be recognized that when Bitcoins are bought and
sold like a commodity—arbitraged like any other
currency—their disposition must give rise to income or
capital gains according to whether they are traded on income, or
held on capital, account.
The takeaway is this. First, tax has always applied to non-cash
receipts, such as are realized upon share exchanges, stock
dividends, dividends in kind, shareholder benefits, employee
benefits and, yes, even barter transactions—unless carefully
structured to access a specific exemption or deferral. Whether you
are paid in dollars, Bitcoins or ham sandwiches, there is a value
to what you receive and you are taxed on that value. Were it
otherwise, tax planning would be simple and tax planners could all
retire—comfortably financed by the tax-free accruing Bitcoin.
Second, although the Bitcoin and its digital ilk may have the
hallmarks of real money, the distinction is academic since, without
a State-sanctioned exchange rate, the Bitcoin does not bestow a
value upon the goods or services but instead must derive its value
from those goods or services, which must then still be valued in
old fashioned dollars. And, finally, when investing in Bitcoins, be
prepared to recognize income or gains when you cash in.
There is also a more technological concern, which should speak
to every early adopter and everyone who has ever lost data. What
happens when there is a bug in your Bitcoin, when problems with the
software cause your digital bank to suspend operations until
further notice? What is the value then? Just ask the clients of Mt.
Gox, the Tokyo Based Bitcoin exchange who did exactly that in the
days before this article was written.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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