Bitcoin has become popular in recent years as a means to conduct online transactions and as a pure growth investment. Although individuals and business owners are using bitcoin more, they may not be aware of how the transactions are treated by the Canada Revenue Agency. As as accountant, it’s important that you advise clients how to properly treat bitcoin when filing taxes.
What Is Bitcoin Exactly?
Bitcoin, the world’s largest cryptocurrency in terms of market capitalization, is a decentralized digital currency that uses mathematics and cryptography to verify the validity of transactions, eliminating the need for a middle man. The records and transactions of bitcoin are kept on a public ledger that anyone can access and review. Sensitive information about any given transaction, such as the parties involved, is only available to the people who have the encryption keys for that transaction. While bitcoin can be used for online purchases, many people invest in the currency directly and view it as more of a commodity than anything else.
Defining Specified Foreign Property
The CRA has announced that it views bitcoin as “specified foreign property” under Section 233.3 of the Income Tax Act. Often, people make the mistake of thinking that foreign property only refers to real estate, but under the CRA’s definition, many other types of assets are included. Funds in foreign bank accounts, shares of foreign corporations, interests in foreign mutual funds, land and buildings outside of Canada, life insurance issued by a foreign issuer, and even precious metals held outside of Canada are all specified foreign property. Bitcoin is now considered part of this category.
How Bitcoin Is Taxed
The CRA treats bitcoin transactions differently depending on the nature of the transaction. Records should be kept of the dates bitcoins were acquired as well as their cost basis. Bitcoin transactions are taxed as income if used in a barter transactions, but bitcoin profits are taxed as capital gains if they are held as an investments. Additionally, any gains over $200 made during currency conversions are taxed as capital gains also.
Reporting Bitcoin Holdings on Tax Returns
To be compliant with the CRA, individual or entities that hold over a certain threshold of bitcoin must file Form T1135 (Foreign Income Verification Statement). As of 2017, individual residents and certain entities must file a Form T1135 if they hold foreign assets with total costs of more than $100,000. This must also be done if the assets were held at any point during the year. The $100,000 is based on the adjusted cost basis of the assets in Canadian dollars, not the fair market value of the bitcoin.
Overall, the declaration of bitcoin as specified foreign property makes the job of the accountant a bit more complicated. Accountants have to be extra careful to gather all of the correct cost and transaction activity for clients engaged in bitcoin transactions or investing. Nonetheless, though additional work is required on the part of the accountant, the good news is that the information is put onto a form that Canadian accountants are already very familiar with.