Admittedly, I don’t know much about Bitcoin or digital currency in general, but with all of the news swirling around Bitcoin, I thought now is as good a time as any to learn a little about the subject. For a good primer on Bitcoin I read this article in The Telegraph: http://www.telegraph.co.uk/finance/currency/10660128/What-is-bitcoin-and-why-is-it-in-trouble.html or this CBC story: http://www.cbc.ca/news/technology/mt-gox-shutdown-a-major-blow-for-bitcoin-1.2550256.
The reason I’m discussing Bitcoin on this frigid day in February is because the world’s largest Bitcoin exchange, Mt Gox, based in Japan, has gone offline overnight. Mt Gox has allegedly lost 745,000 Bitcoins, reportedly worth $375 million US dollars; that’s the equivalent of $500 US dollars per Bitcoin. It’s at a time like this that I wish I had a good digital currency quip up my sleeve…’Cause that’s a lot of gigabytes if you know what I mean…
One of the main differences between internet-based money and traditional fiat currencies is the fact that the former is maintained by an online community, whereas the latter is controlled by a country’s central bank. Call me old fashion, but when my home internet is not reliable enough to download a video of dancing cats wearing top hats without crashing, count me among the skeptics of this extremely popular, growing and even inevitable trend. In any case, the purpose of this article is to explore and share Canada Revenue Agency’s (“CRA”) view on the matter, not mine.
On January 31, 2014 the CRA released an internal memo (2013-051470117) setting out the Minister’s views of Bitcoin and online currencies more generally.
CRA’s position is as follows:
Virtual currencies, such as Bitcoins, are not considered to be a currency issued by a government of a country. As such, they are generally treated as a commodity for purposes of the Income Tax Act. Therefore, using Bitcoins to purchase goods or services would be treated as a form of barter transaction.
As a rule of thumb, barter transactions for income tax purposes are supposed to be recorded as income at the value of the service rendered or goods exchanged. In other words, if you buy or sell goods and receive Bitcoin in exchange for said goods – despite the CRA not recognizing Bitcoin as a currency, as stated above – the transaction must still be recorded for income tax purposes for the value of the goods or services received.
The truth is that CRA’s present position on Bitcoin will be irrelevant if online, non-government issued currency – be it Bitcoin or possibly a successor currency – continues to develop and evolve as a better alternative for the digital – and often borderless – economy than traditional currencies. Countries have the most to lose. Indeed, countries have always used the control of money supply as a central tool in the process of managing their respective economies. For example, setting interest rates, promoting employment, tracking money laundering, balancing budgets, and generally protecting the tax base are all part and parcel of a country’s management of its money supply. It affects every aspect of our economy. It will be interesti
That’s the tax perspective.ng to see how the CRA or other monetary authorities for that matter respond to the foregoing as the line between the real-world and digital economy continues to blur…
P.S. I will expand on digital currency in another blog post as I learn more about it because I believe its implications may be far reaching.