The digital cryptocurrency bitcoin has become popular in recent years, both as a means to conduct online transactions and as a pure growth investment. Although individuals and business owners use and accept bitcoin more now than in the past, they may not be aware of how the Canada Revenue Agency (CRA) treats these transactions. As an accountant, you can help advise clients on 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 central bank or reserve. The Bitcoin protocol logs records and transactions into 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 anyone can use bitcoin for online purchases, many people invest in the cryptocurrency directly and view it as more of a commodity than anything else.
Bitcoin as Specified Foreign Property
The CRA views bitcoin as “”specified foreign property“” under Section 233.3 of the Income Tax Act. Often, people make the mistake of thinking foreign property only refers to real estate, but the CRA’s definition includes many other types of assets. 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 all carry the foreign property classification. As such, the CRA now considers bitcoin part of this category.
How the CRA Taxes Bitcoin
The CRA treats bitcoin transactions differently, depending on the nature of the transaction. The CRA taxes bitcoin transactions as income if you use them in a barter transactions, but it taxes bitcoin profits as capital gains if you hold them as an investment. Additionally, the CRA also taxes any gains over $200 you make during currency conversions as capital gains.
Reporting Bitcoin Holdings on Tax Returns
As of 2018, individual residents and certain entities must file a Form T1135 (Foreign Income Verification Statement) if they hold foreign assets, such as bitcoin, with total costs of more than $100,000 at any point during the year. Keep in mind that the CRA bases the $100,000 on Canadian dollars, not the fair market value of the bitcoin.
Accountants have to be careful to gather all the correct cost and transaction activity for clients engaged in bitcoin transactions or investments. Luckily, the CRA lets accountants file that information on a familiar form, making the task much simpler. With that in mind, consider using accounting software to track and manage your clients’ cryptocurrency acquisitions and investments. You can accelerate your year-end adjustment process and start saving time on corporate returns with QuickBooks Online Accountant. Sign up for free to see how it can help your firm.