WHY READ THIS?
- › Your client owns bitcoins
- › Your client is a bitcoin trader
- › Your client accepts bitcoins as payment
- › Your client mines bitcoins
WHAT TO DO?
Your client has bitcoins in her portfolio
In this case CRA considers bitcoins a commodity, and the tax treatment is the same as owning other securities, says Joseph Gill, a corporate securities and tax lawyer at McKercher LLP.1 Upon sale of bitcoin units, calculate taxable capital gains or losses.
- Complete Schedule 3 – Capital Gains (or Losses) and attach it to your return.
- Report any gains from Line 199 of Schedule 3on Line 127 of your client’s individual tax return.
TIPRecord purchases and sales in a spreadsheet to track gains and losses, says Ryan Lazanis of Xen Accounting.Read: Inside Bitcoin tradingYour client is a sole proprietor who accepts bitcoin payments
CRA doesn’t consider bitcoins to be legal currency, so any transaction where a merchant accepts bitcoins for goods or services is considered bartering. CRA says that bartering creates taxable income.1 Convert bitcoins into dollars.
› Base the conversion on the fair market value, in Canadian dollars, of the good or service your client sells, says Lazanis.TIPDon’t be confused by the market value of bitcoins. “Value the product or service you’re giving up, and include that in your revenues,” says Lazanis.EXAMPLE: A store sells a $20 mousetrap for 0.03 bitcoins. The storeowner then reports $20 in revenue on his tax return, says Gill.2 Include barter revenue when calculating sales tax in Part 1 of Form T2125 – Statement of Business or Professional Activities. List the total income on Line 9946 of the T2125 and put it on Line 137 of the return.NOTE: Check provincial tax rules for PST treatment. TIP If CRA assesses your client’s return and wants transaction proof, refer the agency to the public bitcoin ledger Blockchain, says Ryan Lazanis, founder of Xen Accounting.Income or capital treatment? Read: Fast facts on Bitcoin CRA may tax a bitcoin trade as business income if: › your client works for a broker, trader or lender, and the transaction is similar to others undertaken for the business; or › your client trades bitcoins often; or › your client conducts related business activities, such as advertising bitcoin trading services, researching the bitcoin market and looking for buyers; or › your client purchases bitcoins and sells soon after. Source: CRA Interpretation Bulletin IT-479R Your client mines bitcoins
Bitcoin mining is a taxable business, says CRA. Tax is payable on the fair market value of your client’s inventory at the end of the year.1 Declare income in Part 1 of your client’s T2125.
› Lazanis generally lists mined bitcoins as income in the tax year his clients receive them—not when they use them. 2 List inventory in Part 4 of the T2125.3 Use Parts 5 and 6 of the T2125 to deduct business expenses, such as the cost of computer hardware, electricity or a home office. 4 List the total income on Line 9946 of the T2125 and put it on Line 137 of the return.Your client is a broker or trader
If your client buys and sells bitcoins for a living, CRA could treat her coins as taxable income, says Lazanis. Income is 100% taxable, compared to 50% for capital gains.
› Declare income and calculate sales tax in Part 1 of your client’s T2125.NOTE: CRA hasn’t issued explicit rules on the sales tax treatment of bitcoins. So, Lazanis is cautious and calculates sales tax on the entire value of a transaction his client handles, not just on her commission. Other accountants calculate tax only on commissions.Sources: CRA; Ryan Lazanis, founder of Xen Accounting, CPA, CA in Montreal; Joseph Gill, corporate securities and tax lawyer at McKercher LLP in Saskatoon, Sask.
How does Bitcoin work?
Bitcoin is a digital currency created by an anonymous pro- grammer in 2009. Unlike traditional money, it isn’t controlled by a central bank or government. Using bitcoins allows people and entities to transact without foreign currency exchanges. People get bitcoins through transactions or ATMs, or by mining them: using specialized software to process and verify other transactions. The software rewards such work with new currency. More than 13 million bitcoins have been mined, out of a possible 21 million. Worldwide transactions are recorded on Blockchain.info, a public ledger, and attributed to a particular account, or wallet. Anyone can view a wallet’s transaction record. Other online currencies include Litecoin, Namecoin and Ripple.
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