On August 8, 2019, the Canada Revenue Agency (the "CRA") released an Income Tax Ruling, 2018-0776661I7, clarifying its view on the taxation of cryptocurrency miners.
The ruling responded to a taxpayer inquiry, asking whether a bitcoin miner should include the value of mined bitcoin in income at the time it is received.
Bitcoin miners have an essential role in both the creation and the maintenance of the block-chain technology, which is the foundation of bitcoin itself. When miners, using their computers, solve computation-intensive math problems on the bitcoin network, they produce or create new bitcoin. In addition, in solving the math problems, bitcoin miners verify the network's transaction information, securing the bitcoin payment network.
One might say that miners create bitcoin, in which case mining bitcoin would not be a taxable event. Some in the cryptocurrency sector have analogized bitcoin mining with mining for gold. However, in the ruling the CRA takes the position that miners earn bitcoin, or receive bitcoin as consideration for their work in validating transactions on the block-chain, with the result that miners must include any bitcoin they mine in their income at the time it is received. In other words, the CRA ignores the "creation" element of mining.
The CRA further advises that the value of the bitcoin for tax purposes is determined by the barter rules, which in this case would require that a miner bring into income the value of the mining services rendered or the value of the bitcoin received. Since in most cases the value of the bitcoin will be more readily valued, this is the amount to be brought into income.
While many will find the CRA's position to be obvious given the miners play a key role in servicing the blockchain, those who have relied on the gold mining analogy should note the tax consequences of the CRA position. Another interesting issue is the extent to which "miners" of other cryptocurrencies that may use other methods of creation, can rely on this ruling. In either case, the additional clarity providing by the ruling is useful to everyone working in the cryptocurrency space.
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