Bitcoin (BTC) and other cryptocurrencies have been on a classic rollercoaster ride in the last few months. While early adopters are still in a gain position or have realized their gains, later purchasers may well have a paper or actual loss.
While bitcoins are often viewed as a currency, they are treated by CRA as a commodity. So while a holder of cryptocurrency may view an exchange from BTC to Dash as a swap of cash for cash, it is far different from a tax point of view. Investments, including bitcoins, that are not traded and do not generate income do not give rise to a taxable event.
This means that an investor with one bitcoin at the start of the year worth about $1,000 U.S. who held it at the end of the year has no tax consequences even though it was worth about $14,000 U.S. on Dec 31, 2017. There may be an offshore asset information reporting requirement (T1135) if total foreign asset holdings including Bitcoin exceed $100,000 CDN, but no income tax is due. The flip side of that coin is that if someone bought at the peak of $19,800 US there is no deduction even though the value declined.
The situation is very different for someone who traded in or spent, cryptocurrency. If an owner sold some Bitcoin out of concern of a possible bubble collapse (a wise move given what has happened to digital currency since the start of the year), or for fear that the value may be manipulated by the 1,000 users who own 40 percent of all Bitcoin, there is a taxable transaction that will have to be reported.
The same is true if BTC, Ethereum or Litecoin is spent. As soon as a sale takes place, there is a taxable transaction that has to be reported to CRA. Since the Bitcoin is like a commodity rather than cash, spending it is a disposition that gives rise to a reportable transaction.
If a Bitcoin investor only carries out occasional transactions, the disposition will probably qualify as a capital gain, which is taxable at 50 percent. So, an investor sitting on large appreciation will face tax of about 25 percent (at top marginal tax rates) of the proceeds of a sale, or deemed proceeds if spent.
The exact amount of tax will be computed using the cost of the Bitcoin when purchased. For an occasional trader who purchased cryptocurrency at a high value and disposes of it at a loss, the bad news is that a capital loss can only be deducted against capital gains. And that disposition has to actually take place before the loss can be claimed.
For a frequent trader in Bitcoin, the transaction will not qualify as a capital gain and the entire amount is taxable, or deductible in the case of losses. Remember trading between cryptocurrencies is not tax neutral.
Every sale gives rise to a taxable event that has to be reported. Failure to do so is tax evasion. Also, every owner of Bitcoin is recorded in the blockchain, and the tax authorities have the ability to audit that ownership to make sure that transactions are reported to CRA and that taxes owing are paid.
Author Bio: David J Rotfleisch, CPA, JD is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax dispute resolution including tax litigation. www.Taxpage.com and [email protected]
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