CRA Updates the Tax Treatment of Cryptocurrency

On May 17, the finance department presented draft legislation to amend the Excise Tax Act to begin to treat cryptocurrencies in a manner similar to legal tender. The changes are deemed to have taken place on May 18, 2019 and introduce a new term: the virtual payment instrument.

Up until now, CRA’s policy has been to treat cryptocurrency, such as Bitcoin, as a commodity for income tax purposes. This means that a purchase where the payment is in cryptocurrency was treated as a barter transaction. The tax consequences of this are far different than transactions conducted with legal tender.

For the buyer, the barter transaction involves a disposition of the cryptocurrency at the fair market value of the asset acquired. This may result in a capital gain or loss on the disposition of the cryptocurrency. In addition, although CRA has not explicitly stated this, if the buyer is a GST registrant, it would appear that they will have to have charged GST/HST on the disposition of the cryptocurrency.

Likewise, when cryptocurrency was purchased with legal tender, and the seller is a GST registrant, GST/HST would have been applicable to the purchase.

The new legislation introduces the term “virtual payment instrument” which is a property that is “a digital representation of value that functions as a medium of exchange” and “exists only at a digital address of a publicly distributed ledger.”  A virtual payment instrument is now considered to be a financial instrument. The result is that cryptocurrencies, which are virtual payment instruments, will now be treated as financial instruments, like money.

With these changes, transactions involving cryptocurrencies will be treated more like transactions involving foreign currencies. Gains or losses will still be generated when the value of cryptocurrencies fluctuates, relative to the Canadian dollar from the time of acquisition to the time of disposition. These will be treated as capital gains or losses unless the trading of the currencies is a business.

However, regardless of whether the transaction is on capital or income account, no GST/HST will apply to the purchase or sale of cryptocurrencies. Of course, GST/HST will still apply to the sale of goods or services regardless of whether the payment is in cash or cryptocurrency.

Additional educational resources: Keep up to speed on the latest changes from the federal and provincial governments impacting your clients’ tax burdens. Come to the Spring CE Summits; there’s still time to register for workshops taking place from May 28 to June 4!

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