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Are you contemplating the acquisition of a cryptocurrency such as Bitcoin or Litecoin? The reasons for, and circumstances surrounding, such acquisitions vary widely, including "crypto-mining" activities, buying and selling for speculative investment purposes, and as a means of facilitating the purchase and sale of goods, services or other transactions.
The technology underlying digital currencies may offer the benefits of increased privacy and reduction of intermediaries and associated transaction fees normally associated with cash transactions. However, the acquisition, holding and disposition of a cryptocurrency regardless of how anonymous it may seem has Canadian tax implications. Any potential holder of a cryptocurrency must understand the applicable Canadian tax landscape, including the transactions that trigger a taxable event, and ensure that it is fully compliant with its tax reporting and paying obligations.
These cryptocurrencies can generally be bought and sold on specialized exchanges and are increasingly being accepted as payment in lieu of fiat currency in a wide variety of commercial transactions. In other words, think of cryptocurrency for income tax purposes as being the virtual equivalent of a precious metal such as gold or silver.
Typically, the first question asked regarding the taxation of cryptocurrencies is whether the acquisition of the cryptocurrency is a taxable event that potentially triggers a Canadian income tax liability to the person acquiring the cryptocurrency. The answer depends on the manner, purpose and circumstances in which the cryptocurrency is acquired. For this purpose, the mined cryptocurrency will generally be treated as inventory of the business.
Such a holder will have a myriad of tax issues that are distinct from the acquisition of cryptocurrency from non-mining activities, which are not addressed in this blog and must be reviewed on a case-by-case basis. The acquisition of cryptocurrency as a pure speculative investment, similar to physical gold or a publicly-traded security, is generally not a taxable event to the person acquiring the cryptocurrency. This is to be contrasted with the acquisition of a cryptocurrency as consideration for the provision of goods or services or as compensation for some other right of payment.
Once a cryptocurrency has been acquired, it will be important to determine its cost for Canadian tax purposes, which is a fundamental concept for determining the future income tax consequences on an eventual disposition of the cryptocurrency. Where a cryptocurrency is purchased in exchange for Canadian currency, the cost for income tax purposes of the cryptocurrency will be equal to the amount of such cash paid, plus any directly related acquisition expenses. If foreign currency is used, the holder will generally be required to convert the foreign currency into the Canadian-dollar equivalent at the applicable rate pursuant to normal tax rules.
This may not always line up exactly with the fair market value of the cryptocurrency at the time of the barter transaction. The person will be considered to have acquired crypto 1 with a tax cost equal to the fair market value of the crypto 2 given up in exchange, computed as of the time of the barter transaction.
You will realize taxable income or loss on an eventual disposition of a cryptocurrency. This is a material distinction for tax purposes. This is a factual, case-by-case determination requiring a detailed review of the nature of your dealings with the commodities in question. Again, this issue is fact-dependent and should be reviewed on a case-by-case basis. Canadian tax law restricts the type of investments can be held in deferred investment plans e. Transacting in cryptocurrencies also gives rise to unique sales tax implications that must be considered based on the facts relating to any particular transaction.
Holders and prospective holders of cryptocurrency will need to ensure that all potentially relevant Canadian tax issues are considered and to stay on top of evolving legal trends and administrative interpretations. Special thanks to articling student Rehman Mir for his assistance with preparing this article.
Written by Matthew Peters and Martin A. Sorensen Are you contemplating the acquisition of a cryptocurrency such as Bitcoin or Litecoin? Acquisition of Cryptocurrency—A Taxable Event? What is My Cost in the Cryptocurrency? Tax on Disposition of Cryptocurrency You will realize taxable income or loss on an eventual disposition of a cryptocurrency.