Over the past few years, you’ve probably heard talk of Bitcoin, which can seem like a rather mysterious virtual currency to those who are not familiar with it.
Many individuals and organizations world-wide have decided to invest in Bitcoin and promote its use as a financial instrument. But is it really worthwhile for individuals and businesses in Canada and Quebec to follow suit?
To shed some light on this subject, our corporate tax experts have prepared this guide to cryptocurrency and taxation.
- Bitcoin and Cryptocurrency: Definition
- How to acquire cryptocurrency
- Bitcoin and taxes: implications for cryptocurrency in Quebec and Canada
- Improve your understanding of business taxation with T2inc
Bitcoin and cryptocurrency: definition
Bitcoin is one example of cryptocurrency, a currency and payment system that is entirely digital.
Owners of this virtual currency can keep it or use it as a form of payment with retailers who accept it. Bitcoin can also be exchanged on a peer-to-peer basis or via an exchange platform, without the need to go through a traditional financial system.
Unlike national currencies (Canadian dollar, Euro, e.g.), Bitcoin, Ethereum and other types of cryptocurrency are not regulated by governmental authorities because they do not have physical forms, nor are they accepted as legal tender in most countries. They are considered property.
Bitcoin and virtual currencies have become immensely popular for this reason. Furthermore, exchanges and transfers made with this type of payment system are highly secure due to extensive encryption.
Like fiat money, Bitcoin value fluctuates. It has had some fairly major crashes, including one in 2013 where its value dropped by 50% in one day.
Despite that, Bitcoin and cryptocurrency continue to gain popularity throughout the world.
How to acquire cryptocurrency
Cryptocurrency differs considerably from fiat money, including in the way you actually go about getting it.
Bitcoin and virtual currencies can be acquired in three ways:
1. Mining Bitcoin and cryptocurrency
Mining is the most important operation in the Bitcoin network. The procedure consists of discovering new “coins” that are recorded in a ledger. Every cryptocurrency has a set number of coins that can be discovered this way.
In order to mine cryptocurrency, miners have to configure their hardware and computers to solve a very complex cryptographic puzzle. The first miner to crack the puzzle gets the cryptocurrency.
2. Trading cryptocurrency
Cryptocurrency can also be traded. Traditional currency can be exchanged for Bitcoin.
3. Exchanging cryptocurrency
Individuals and businesses can acquire cryptocurrency in exchange for services. The cryptocurrency would be considered payment for these goods or services.
Bitcoin and taxes: implications for crypto in Quebec and Canada
In general, the Canada Revenue Agency and Revenu Québec do not tax cryptocurrencies. In fact, virtual currency transactions are considered bartering.
That said, there are different implications for the use and “disposition” of virtual currency by businesses and taxpayers in different contexts such as:
- Acquiring goods and services
- Converting of cryptocurrencies into monetary currency
- Exchanging for other cryptocurrencies
- Selling cryptocurrency
- Donating cryptocurrency
Trade and bartering with virtual money
As previously mentioned, transactions made with virtual currency are considered to be bartering. That said, the barter tax code dictates that you must still declare all income and expenses, even if the transactions are not made in cash.
If you sell a loaf of bread and get paid in cheese, babysitting hours, or Bitcoins, you still need to report it on your tax returns. Since you can't report this currency as income, you must report the typical cash value you would normally charge for these services.
Declaring crypto-related income
If your business uses cryptocurrency in any way, you must then determine whether the profit you made is considered income or capital gains. This step is critical, because income and capital gains are subject to very different tax treatments.
Business income or loss
A business that frequently sells or trades cryptocurrency must include the value of the goods or services traded when calculating its business income, which will be taxable in full.
As previously discussed, a business that accepts payment in cryptocurrency must include the equivalent cash price normally charged for the good or service when calculating its income.
Capital gains or losses
A capital gain may be realized if the fair market value (FMV) of the virtual currency at the time of its disposition is greater than its adjusted cost base (ACB).
Capital gains are generally also included in income for the year. However, only half of the capital gain is taxable.
Collecting GST/HST and QST when paying with cryptocurrency
If your business accepts cryptocurrency as a method of payment for taxable goods or services, you are required to collect and remit GST/HST and QST as per the current regulations.
Taxes applied to the supply of taxable goods or services must then be calculated based on the Canadian dollar value of the virtual currency.
Legislative amendments may soon change the status of cryptocurrencies from “property” to “financial instrument” in order to simplify the taxation of transactions involving cryptocurrencies.
Cryptocurrency-related documents to keep for your taxes
According to Revenu Québec, “If you trade, buy or sell virtual currency or engage in mining activities, you must keep records and documents supporting the information in them for six years following the last year they cover.”
Businesses that accept cryptocurrency as payment for goods and services are also subject to this rule.
You must keep the following information and documents for business accounting purposes:
- transaction dates
- receipts for the purchase or transfer of virtual currency
- the value of the virtual currency in Canadian dollars at the time of each transaction
- the digital wallet records and cryptocurrency addresses
- a description of the transaction and the other party (cryptocurrency address)
- the exchange records
- accounting and legal fees
- software costs related to managing your tax affairs
If your business offers mining services, you should also keep the following documents for tax purposes:
- receipts for the purchase of cryptocurrency mining software
- receipts to support your expenses and other records associated with the mining operation
- memory pool records
Improve your understanding of business taxation with T2inc
If you are considering accepting cryptocurrency or investing in Bitcoin with your business, it's important to understand the tax implications. While it may be advantageous for your business, cryptocurrency may complicate your accounting and taxation.
If you need help untangling all the rules regarding the tax treatment of Bitcoin, T2inc's tax accountants can help. Contact us to get advice from our specialists!
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
