Introduction - Bitcoin & Altcoins Canadian Reporting Requirements
Cryptocurrencies such as Bitcoin, Dash, Ether, Litecoin, Ethereum and Ripple have been the subject of intense media coverage in recent months due to their general astronomical surge in value. Holders of Bitcoin and other cryptocurrencies contact our Canadian tax law firm on a daily basis to discuss the tax implications of buying and selling Bitcoin or Dash, however there are tax issues that can go beyond the Canadian tax result of a given transaction or transactions which, subject to the discussion below, is that transfers or sales of BTC or other cryptocurrency are generally taxable dispositions under the Income Tax Act. Foreign reporting requirements can attach to BTC because they may potentially qualify as specified foreign property under the Income Tax Act. In addition, depending on the scope of your cryptocurrency operations, there may be benefits to incorporation. Our top Toronto tax lawyers can help identify your Canadian tax obligations, and tax planning opportunities, with respect to Bitcoin.
Bitcoin and Cryptocurrency as a Medium of Exchange
CRA's published position is that Bitcoin and other cryptocurrencies are characterized as commodities for Canadian tax purposes. As a result of that characterization, the purchase of goods and services using Bitcoin are treated as barter transactions and the cost and sale price to the purchaser and vendor, respectively, of the goods or services provided is generally considered to be the value of those goods or services. This concept is relatively simple to apply when dealing with goods or services that have a generally accepted value, for example the purchase of groceries from a store or a mechanic performing an oil change, but can be difficult when there is no established consensus on the value of goods or services provided by a vendor. In such a case, CRA may choose to include the value of the cryptocurrency received, and not the value of the goods or services provided, in the vendor's income.
Bitcoin and Cryptocurrency – Trading vs. Providing Services
Trading in cryptocurrencies is subject to the same Canadian tax law rules as trading in shares or commodities such as gold. Generally, gains realized on the disposition of Bitcoin and Altcoins are taxed as capital gains. However, if the facts suggest you are carrying on a business trading cryptocurrencies, gains realized are fully taxable as business income. The distinction between income from capital and income from business or property is a basic principle of Canadian tax law and is very fact-driven. Our team of Canadian tax lawyers are experts on the Income Tax Act and will undertake a comprehensive analysis of your circumstances to determine the proper characterization of your Bitcoin operations.
Other cryptocurrencies employ systems that involve the payment of Altcoins in exchange for services. For example, Dash Masternode owners are attributed a portion of all Dash that is mined on the Dash Network in exchange for certain vital services they provide to the Network. Such payments are contingent on the provision of a service and are thus properly characterized as income from business. The Dash Network also allows for third-parties to put forth "proposals" to the Dash Network which, if successful in the voting process, result in the successful proposal "owner" receiving payments in Dash from the Dash Network, on either a one-time or continuous basis depending on the terms of the proposal, in exchange for providing the service to the Dash Network. Such an activity is also properly characterized as income from business.
Bitcoin & Cryptocurrency Foreign Reporting Requirements – Form T1135
Taxpayers are required to file Form T1135 with CRA if they own specified foreign property that in the aggregate cost more than $100,000. In a technical interpretation issued in April of 2015, CRA took the position that Bitcoin, and by extension Dash, Ether and all other cryptocurrencies, constitute "funds or intangible property" and that to the extent that the cryptocurrency is situated, deposited or held outside of Canada and not used or held exclusively in the course of carrying on an active business, it will be considered specified foreign property for purposes of the Income Tax Act. Therefore if a Canadian taxpayer has cryptocurrency for which they paid $100,000 or more situated outside of Canada on a foreign exchange, or if their investment in that cryptocurrency cost less than $100,000 but they already had other specified foreign property that cost in excess of $100,000, they are required to report their cryptocurrency to CRA via the filing of Form T1135. A failure to file Form T1135 as and when required by the Canadian Tax Act carries an automatic penalty of $2,500 for each annual failure to file, with higher penalties and criminal prosecution a possibility for particularly egregious examples of non-compliance.
Tax Tip – Bitcoin & Altcoins Incorporation to Save Tax
It certain circumstances it might be beneficial to incorporate a given cryptocurrency operation. While there are likely limited benefits to simply buying and selling cryptocurrency through a corporation, the structure of certain cryptocurrencies may make incorporation worthwhile. As noted above, the Dash cryptocurrency employs a governance structure that involves Dash Masternode owners that provide certain vital services to the Dash Network, for which they are rewarded with payments in Dash from the network when Dash additional Dash is mined from the blockchain. Dash users are also able to submit proposals to the Dash network which, if accepted, could potentially involve the proposal "owner" providing a given service to the Dash network in return for Dash, potentially on an ongoing monthly basis. The operations of Dash Masternode owners and Dash proposal owners could generally be eligible for active business income treatment if carried on through a Canadian corporation. In such a case, the owner of Dash would incorporate a corporation and transfer their Dash to the corporation via a tax-free rollover under the Income Tax Act. In addition, the mining of BTC and cryptocurrency will be characterized as earning income from business and could be eligible for active business income treatment if carried on through a corporation. All Altcoins are unique and comprehensive analysis is required in each case. Make an appointment with one of our leading Canadian tax lawyers to discuss your Bitcoin or Altcoin facts and obtain a detailed tax plan.
Conclusion – Cryptocurrency Reporting Obligations
Many Canadians are realizing substantial gains on the disposition of Bitcoin and other cryptocurrencies that have appreciated in value during the current boom. While these gains are of course subject to Canadian tax when realized through a sale, exchange or provision of a service, the ownership of BTC also requires taxpayers to ensure they are keeping up to date with their foreign asset reporting obligations under domestic Canadian tax law. Canadian resident taxpayers must file Form T1135 with CRA if the total cost of all of their specified foreign property (including cryptocurrency) is more than $100,000 and a failure to do so could result in a tax assessment with significant penalties being issued to the taxpayer by CRA. Depending on the level of activity in a taxpayer's Bitcoin or Dash operations, there may be potential tax savings to incorporating their BTC or Altcoin operations. Our Canadian tax lawyers can identify your tax reporting obligations and make sure you do not end up on the wrong side of CRA.
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.