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Tax and the Bitcoin: Real Money Owing to CRA

Posted: January 09, 2018 By : Knowledge Bureau Staff
Posted in: Strategic Thinking, Financial Literacy, CRA, dividends, investments, trading, knowledge bureau, Evelyn Jacks, income tax, tax courses, bitcoin, tax education, financial education, Real Wealth Manager, interest, capital gains tax, taxation issues, Bitcoin value, Bitcoin trading, tax on digital currency, gold, PayPal tax

“Bitcoin Rush” is all over the news as speculators have tried to get in on the trend which saw skyrocketing values at the end of 2017. But there is a spoiler: gains on trading digital currencies like Bitcoins are subject to taxation in Canada, a liability that must be settled in real dollars.

It’s something traders in the current craze will want to take into account as they prepare to file 2017 tax return. There are two specific circumstances that warrant traders’ attention: First, if digital currency is used to pay for goods and/or services, you’ll have a taxable barter transaction. Second, when digital currency is bought or sold like a commodity, resulting gains or losses will have tax consequences – capital gains or losses are reportable on Schedule 3.

It’s also important to recognize that Bitcoin falls under a different category than standardized currency and, amidst investor interest, there has been volatility that could make it an investment risk. Here’s more on the crypto currency craze:

What is Bitcoin?

CRA defines digital currency as "virtual money" that can be used to buy and sell goods or services on the Internet, and this includes Bitcoins, which can be bought and sold in return for traditional currency, and can also be transferred from one person to another.

Bitcoin is not controlled by banks or the government, and is available to purchase and trade on digital exchange sites. It’s most often used for investing, and has been called “the gold of the digital era.” Why? Because production is not centrally controlled, it is not as widely available as other types of currency, and rarely is it used offline for the purchase of goods.

There are some challenges that come with any type of digital currency like Bitcoin, as there is the risk of double spending. Unlike online transactions completed through a bank (via credit card, debit, or other transfer services), it is harder to control and effectively document the transfer process, confirming that in fact when it leaves one person’s possession, they no longer have access to those funds. There is a documentation process on a digital public ledger that goes through a blockchain; however, there is no traditional intermediary like a bank that processes and monitors the transactions.

It’s simple to get your hands on Bitcoin – you just need to install the app and purchase it with traditional monetary funds. How much? That’s where things get complex. Bitcoin’s value has been rising and falling quite dramatically, though the overall trend has certainly been growth, and that’s spawned the current “Bitcoin Rush.”

Why Is Bitcoin in the News?

   

Bitcoin is becoming more widely traded, and a number of companies have unveiled plans to accept it as currency. As a result, Bitcoin is being traded in the five-figures, a huge contrast to its $15 value at inception. It carries investment potential with investors speculating that its value will continue to rise since it pays no interest or dividends, and it’s simple to purchase.

After this dramatic rise, Bitcoin value has more recently fallen as a result of China and Israel indicating that they will not recognize it as a currency, and financial regulators are putting restrictions in place to restrict Bitcoin mining. China in particular has been vocal about the fact that they believe firms focused on the mining of this cryptocurrency are wasting precious resources, such as electricity, in their endeavors. If other countries take a similar stance, value will continue to fall, despite the large-scale companies embracing Bitcoin, making it a much more volatile investment.

How Should Financial Pros Address This Bitcoin Craze?

As the Bitcoin craze continues, tax and financial advisors should familiarize themselves with this unique form of digital currency and its investment potential for their clients. Tax professionals in particular need to take measures with clients to ensure transactions are appropriately documented.

As we head into 2018, it’s become clear that the CRA intends to put increasing emphasis on targeting digital transactions in their audit processes, and remaining above board with income generated through the likes of Bitcoin and PayPal, VRBO and other online transactions should be a priority.

Additional educational resources: Advanced Tax Update at the CE Summits starting in Winnipeg on January 18 and then moving on to Toronto, Ottawa, Calgary, Edmonton and Vancouver January 22 – 26 respectively.  Enrol Now.

Online:  Real Wealth Manager Designation and DFA-Tax Services Specialist Designation

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