Digital currency, real tax

With all the media buzz, it’s not surprising that digital currencies such as Bitcoin are growing in popularity. In fact, Vancouver-based company Bitcoiniacs and Nevada, U.S.-based company Robocoin launched the world’s first Bitcoin ATM in Vancouver in October 2013.

And it seems Canadian Revenue Agency (CRA) took note. In November 2013, the agency issued a fact sheet reminding everyone that even digital currencies have reporting requirements.

What is digital currency?

A traditional currency, such as the Canadian dollar, has value because a country’s government declares it legal tender and guarantees its value. Digital currency, though, isn’t typically governed by big banks or governments and is often only usable online.

Recent digital currencies can employ cryptography to create currency units, secure transactions and guard against digital counterfeiting. But digital currencies don’t always have the best reputation, with Bitcoin gaining notoriety in 2013 when the IRS shut down Silk Road, an online illegal drug market where Bitcoin was the primary currency.

Tax reporting

You’re required to calculate and report taxes in Canadian dollars, so when you’re calculated transactions in other currencies — digital or otherwise — you need to convert back into Canadian dollars. With traditional currencies, there are published exchange rates with other central banks to help with this.

With digital currencies, it’s a bit trickier. Though there are online exchanges that will quote digital currencies in Canadian dollars, they aren’t directly recognized for tax purposes. Instead, CRA considers these types of transactions as barters — the exchange of one commodity for another without using money. The value of the exchange is essentially fair market value in Canadian dollars, on the same basis as if cash was the consideration.

Apart from being used in exchange for goods and services, digital currencies can also be bought and sold as commodities.

Depending on who is involved and how the transaction is carried out, the tax treatment may be:

• current income or expenses;
• acquisition or disposition of capital property;
• eligible capital property (goodwill);
• personal-use property; or
• inventory.