Bitcoins and CRA

It’s been a month of turmoil in France, Turkey, the US and even Brazil.  In such times people consider alternative investments, such as gold (traditionally) and bitcoins (non-traditionally), as safe havens.

But, don’t count tax risk out:  CRA has a definitive policy on the taxation of both. Today’s focus: the lesser known bitcoins.

When transactions in which a “currency” like bitcoins take place, the rules for barter transactions come into play.  As there is no standard for translating the value of the bitcoins, the transaction is deemed to have taken place at fair market value.  That is, the amount paid by the buyer and the amount received by the seller are both deemed to be the fair market value of the goods or services that were transferred.

For trades for personal goods, the value is often moot as it is only important to determine the cost or proceeds if the goods or services that change hands are related to business income, income from property, or the goods are capital in nature.

If the goods or services are consumed in the process of earning income from a business (or rental property), then the fair market value of those goods or services is the amount that may be claimed as a business (or rental) expense.

Where the goods are used on an ongoing basis to earn income from property, then their fair market value at the time of the transaction is the capital cost for CCA (Capital Cost Allowance) and for the purposes of determining any gain or loss when the asset is disposed of.

But what if the bitcoins were purchased with currency or were later sold for currency?  In this case CRA considers those transactions to be capital in nature.  Both the proceeds and the cost of the bitcoins is deemed to be the paid or received to obtain or sell the bitcoins. The difference between the proceeds and cost are a capital gain or loss.

Here’s an Example: Purchase and Sale of Rental Property for Bitcoins
In 2012 Edgar purchased 10,000 bitcoins at a cost of $100,000.  In 2014, he traded 1,000 bitcoins for a rental property.  The assessment of the rental property was land value: $200,000; building value: $300,000.  In 2016, he sold the rental property, again for 1,000 bitcoins.  The assessed value of the land at that time was $275,000. The value of the building was $325,000.

At the time of purchase, Edgar is deemed to have purchased the rental property for its fair market value or $500,000.  This amount is also the deemed proceeds of disposition of the bitcoin.  The 1,000 bitcoin were originally acquired for $10,000 ($100,000 x 1,000/10,000) so Edgar will report a capital gain of $500,000 - $10,000 = $490,000.

In 2016, the property is deemed to have been disposed of for its fair market value at that time ($600,000).  This will result in a capital gain on the land, a capital gain on the building and recapture of any capital cost allowance Edgar claimed while he owned the property.  The deemed cost of the $1,000 bitcoins he acquired when he sold the property is $600,000.  This amount would be added to the ACB of any bitcoins he owned at the time.

Additional Educational Resources include Knowledge Bureau's EverGreen Explanatory Notes.

Refer a Friend	Research	Calculators	Course Trials