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 3 on Line 127 of your client’s individual tax return.
Read: Inside Bitcoin trading
Your 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.
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.
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.
Read: Bitcoin isn’t going away
Sources: CRA; Ryan Lazanis; Blockchain.info; Government of Canada
Originally published in Advisor's Edge Report