Corporate tax

In the last few years, you have probably heard about Bitcoin, which can seem like a rather mysterious virtual currency to those who are not familiar with it.

Many individuals and companies around the world have decided to invest in Bitcoin. Is it worthwhile for Canadian businesses? How exactly does cryptocurrency work, and how is Bitcoin taxed?

Here’s what you need to know about cryptocurrency and the tax implications of Bitcoin for Canadian businesses.

What is Bitcoin? Definition of cryptocurrency

Bitcoin is one example of cryptocurrency, a currency and payment system that is entirely digital. Bitcoin and other types of cryptocurrency are not regulated by government authorities like the Canadian dollar and the Euro are.

Bitcoin and virtual currencies have become immensely popular for that reason. Furthermore, exchanges and transfers made with this type of payment system are highly secure due to extensive encryption.

Like fiat money, Bitcoin experiences fluctuations in value. 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 does cryptocurrency work?

Cryptocurrency differs considerably from fiat money, including in the way it is acquired.

Bitcoin and virtual currencies can be acquired in three ways:

1. Mining Bitcoin and digital money

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.

That’s where taxation comes in.

Taxation and Bitcoin: tax implications of virtual money for businesses

In Canada, the tax treatment of cryptocurrency can vary somewhat. Generally, the Canada Revenue Agency does not consider cryptocurrency taxable.

However, if you perform any transaction that is considered a “disposition,” certain tax regulations may apply and affect your business taxes.

What is considered a disposition?

A disposition refers to the way you dispose of something, whether by sale, transfer or gift. Businesses and individuals making these types of cryptocurrency transactions may face tax consequences:

  • Selling or donating cryptocurrency
  • Trading or exchanging cryptocurrency
  • Converting cryptocurrency to fiat money (like the Canadian dollar)
  • Using cryptocurrency to purchase goods or services

Determining whether profits are considered income or capital gains

If your business disposes of cryptocurrency in any way, you must then determine whether the profit you made is considered income or capital gain. This step is crucial, because income and capital gains are subject to very different tax treatments.

Every situation must be evaluated on a case-by-case basis. Most of the time, commercial activities are repetitive transactions. However, in some situations, a single transaction may be considered a commercial activity, as is the case for projects that involve risk or matters of a commercial nature.

You should also take the date you started your business into account. Funds and assets received in order to start a business are not usually considered income.

Reporting cryptocurrency income or capital gains in Canada

If your use of Bitcoin or other cryptocurrencies can be considered a commercial activity, you must include the profits on your corporate income tax return.

Of course, you will need to convert the amounts of these transactions into Canadian dollars. This should be done using the exchange rate in effect on the day the transactions were made.

If you have paid your employees in Bitcoin, this also applies to them. They will need to convert the payment amount into Canadian dollars based on the exchange rate the day they received it in order to determine their income.

Capital gains are also usually included in yearly income. However, only half of the capital gain is taxable.

Improve your understanding of business taxation with T2inc

If you are considering 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. Feel free to contact us to get advice from our specialists.

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