How Will The CRA Treat "Bitcoins" for Income Tax and GST?1
Barry R Hull
Hull Tax Consulting Ltd.
In the last issue I spoke about the treatment of virtual currency for income tax and GST purposes. The
question that many people have right now is: "What is a 'bitcoin' and how does it affect me?" "Is it
money or currency under the meaning of either of those two terms for tax purposes in Canada (or
beyond)?"
Generally speaking "currency" can mean a physical "item, (such as a coin, a government note or a
banknote) that circulates as a medium of exchange."2 Compare this to the meaning of "legal tender"
which is defined as "The money (bills and coins) approved in a country for the payment of debts, the
purchase of goods, and other exchanges for value.3 "Currency" can be more broadly defined as "the
money in general use in a country, or any other commodity used as a medium of exchange"4
"Money" is often thought of as "current medium of exchange in the form of coins and banknotes".5
There seems to be some confusion overall as to whether "money" is specific to physical media (coins
and bills) and "currency" includes money and other similar forms of tender, or that "currency" is the
physical media of a country and it is included in the general term "money".
I would say that the media uses "currency" in a very broad sense to mean anything used to allow
transactions between a supplier and a recipient, even where each person on either side of a deal is both
making a supply and receiving another supply.
Methods of exchange preceded governments and banks, going back to when people traded various
goods through barter for services and other goods. Of necessity, the method of exchange had to allow
for timing differences when the trade was the barter of goods given now for goods to be received later,
and eventually, as the form of exchange became widely used, it became "currency" that had value itself,
regardless of what goods or services may have originally created its value. This was simple when the
"GST & Commodity Tax" Vol. XXVII No. 8 December 2013 pages 61-63 (Thomson Reuters Canada Limited 2013)
2
Black's Law Dictionary, 9th ed., Bryan A. Garner, ed., published by Thomson Reuters.
3
Ibid.
4
Judy Pearsal and Bill Trumble, eds, Oxford English Reference Dictionary, 2nd ed.; Oxford University Press.
5
Ibid.
currency had intrinsic value. A horse or sheep, pieces of fabric, tools or metals were often used to
secure the debt one person incurred in obtaining goods or services in return for a future provision of
property or services.
Eventually, precious stones, metals or minerals that were widely accepted as a proxy for other
commodities became the currency that allowed commerce. The next step that came with the
involvement of governments and then banks, was the creation of "money" in the form of coins or paper
that was guaranteed to be exchangeable for the commodities that were universally accepted. It is the
more recent invention of fiat money, where there is no commodity backing the money, but rather a
promise by a government that the coin or bill will be worth a certain value (its "face value").
The world still uses fiat money to a large extent, but as banks and government threaten to fall, many
people are looking to other forms of currency to maintain their wealth.
People still use physical media to store wealth, despite the promises of governments, and "coins and
bills are often traded for land, tangible property (works of art, vehicles, other goods), items that people
feel will retain their value better than the government's currency. People will also invest in intangible
property to retain and grow the value of their stored wealth: stocks and bonds, commodity futures, and
other financial instruments.
Unlike "money", which has a fixed value on its face, other forms of “currency” may be subject to
fluctuation due to a change in the supply and demand for the medium.6 This results in people acquiring
the media not for use in exchange of commerce, but rather in a gamble that what is in low demand
today will become more desirable tomorrow, causing their stored value to increase through no effort of
theirs except in acquiring the media.
Perhaps there is a fine line between what is occasionally used as a form of currency to effect commercial
transactions and what has become accepted by the masses as true "currency" that you can expect will
be exchangeable for other commonly accepted currency, coins and bills of one of the countries of the
world.
The Canadian tax legislation is designed to have all income translated into Canadian dollars. Both the
Income Tax Act and the Excise Tax Act will treat a barter transaction as having consideration at the FMV
of either of the parts being traded as calculated in Canadian dollars and that is where the Canada
Revenue Agency must start.
The rules require that the person reporting income or taxable supplies, must use a standard means to
translate the consideration received in equivalent Canadian dollars. The Bank of Canada is the most
6
Even the coins and bills issued by countries may have "currency arbitrage" where the relative value of one
country's money increases or decreases in comparison with another country's money.
common arbiter of what currency is worth in Canadian dollars, but if they do not show a comparison,
the registrant or taxpayer is left to come up with some other estimate of worth in Canadian dollars.
If all currency held uniform value, it would be simple to determine what "income" resulted from a
commercial action by comparing the value of inputs to the transaction with the value received at the
end. When the increase in value is due to an exchange gain resulting from the swap of currencies, it
may still be "income" but for income tax purposes, the type of income may change.
For GST and HST, where we have gains in currency, the result may be "financial services" which are
generally exempt of tax. However, "financial services" are defined in subsection 123(1) of the Excise Tax
Act and they are tied to transactions around "financial instruments".
"Financial instrument" means:
(a) a debt security,
(b) an equity security,
(c) an insurance policy,
(d) an interest in a partnership, a trust or the estate of a deceased individual, or any
right in respect of such an interest,
(e) a precious metal,
(f) an option or a future contract for the future supply of a commodity, where the option or
contract is traded on a recognized commodity exchange,
(g) a prescribed instrument.
(h) a guarantee, an acceptance or an indemnity in respect of anything described in paragraph
(a), (b), (c), (d), (e), (f) or (g), or
(i) an option or a contract for the future supply of money or anything described in paragraphs (a)
to (h).
[There are no prescribed instruments for the purpose of paragraph (g).]
When we look at "bitcoins" they are not any of the above, since they do not tie back to any other
financial instrument. They are acquired for the item itself and it represents no guarantee of payment of
some other financial instrument or of "money".
"Money" is defined in subsection 123(1) of the Excise Tax Act as:
Money includes any currency, cheque, promissory note, letter of credit, draft, traveler's cheque,
bill of exchange, postal note, money order, postal remittance and other similar instrument,
whether Canadian or foreign, but does not include currency the fair market value of which
exceeds its stated value as legal tender in the country of issuance or currency that is
supplied or held for its numismatic value
The use of the word "includes" leaves us open to use any dictionary meaning of the word "money" and
as noted above, people tend to use "money" and "currency" interchangeably to mean both government
coins and bills and other forms of media used as an intermediary between a buyer and seller of goods or
services.
The Excise Tax Act does carve out any "currency" that has a FMV higher than its stated value, but that
presumes the "currency" is a form of fiat money, where a government or a bank guarantees the face
value.
One of the biggest problems with trying to include bitcoins in the definition of currency or money, is that
they have no intrinsic value, do not promise to be exchangeable for other goods or services, are not
guaranteed by any bank or government and in fact, have no real value other than their demonstrative
rarity (and the fact that people want to buy them).
Each bitcoin represents a cryptographic unique solution, that is identified and then tracked by an
anonymous group and they keep a log of each owner of a bitcoin, at least by the internet address given
when the bitcoin is purchased.
The value is subject to great fluctuation and with many people speculating on the increase in value of
the bitcoins, they are being used as a form of lottery ticket as opposed to a medium between a supplier
and a customer. There are some suppliers who are willing to accept a bitcoin as consideration for selling
their goods or services. At this point in time, most suppliers who accept bitcoins also accept
government currency. If we treat the bitcoin as intangible property, when one is accepted for a supply,
it is a barter transaction and the value for both sides will be the value of the goods or services traded for
the bitcoins.
The CRA will have to determine the value of goods or services traded for bitcoins and assess income or
GST/HST based on that value.
Even if the bitcoin becomes used more frequently as media for business transactions, we still have the
problem that there is no face value for each bitcoin with which to compare the price paid. I believe that
even if we could set a standard value for a bitcoin, the value people are willing to pay for one would
easily exceed that standard value, so the exclusion from "money" as defined in the ETA would apply.
The CRA may be forced to do more and more net worth assessments, where taxpayers and registrants
do not report revenues represented by bitcoins, since tracking how many bitcoins an individual owns
could be impossible. While there is a block chain that tracks the ownership change of every bitcoin, it
does not tie back to an individual, or to a country, but rather to internet "wallets" that are impossible to
see or to attach back to an individual.
Many people are buying bitcoins because they feel they are untraceable by governments and therefore,
outside the income tax legislation. However, the governments can track the bitcoins well enough for
those making large transactions to have concerns that the deals are not translucent.
My overall position is that bitcoins are not "money" or a "financial instrument" but something close.
But being used as money may cause the CRA to make up a policy on treating them as currency and the
problem becomes how to translate their value to Canadian currency