Bitcoin, the very first cryptocurrency, was created in 2009. Ten years and many thousands of cryptocurrencies later, taxation and regulatory agencies around the world are finally starting to realize that cryptocurrencies are here to stay.
The Canada Revenue Agency (CRA) has been particularly slow in its issuance of guidance to the cryptocurrency community, leading to widespread confusion and non-compliance. However, since its initial guidance (which was only a paragraph or two in length), the CRA has issued a few guides and technical interpretations covering a number of topics relating to the taxation of various cryptocurrency transactions. This Tax Alert will serve as an update on where the CRA stands on the taxation of cryptocurrency and will examine what we may have to look forward to in future CRA releases.
Cryptocurrency mining update
In our October 26, 2018, Tax Alert, we critiqued the CRA’s position on the taxation of Bitcoin mining as set out in its 2014 technical interpretation.1 The CRA stated that Bitcoin miners would recognize revenue upon the eventual disposition of the mined Bitcoin. Essentially, the CRA was treating the Bitcoin mining process as similar to farms or gold mines, which recognize revenue when the farmed or mined product is eventually sold.
In our Tax Alert, we proposed that Bitcoin mining was more in line with the concept of providing a service−specifically, the service of maintaining the integrity of the blockchain network in exchange for Bitcoin. We concluded that the revenue should be recognized at the point the miner is compensated with the rewarded Bitcoin. The sale, exchange or consumption of the Bitcoin would be a secondary transaction resulting in a secondary taxable event that is not related to the actual mining process.
The CRA issued an internal technical interpretation2 on August 8, 2019, more in sync with our position. That interpretation states, “In our view, Bitcoin received by a miner to validate transactions is consideration for services rendered by the miner. Where a taxpayer is in the business of Bitcoin mining, the Bitcoin received must be included in the taxpayer’s income at the time it is earned under section 3 and section 9 of the Income Tax Act.”
This is a welcomed interpretation from the CRA, as it better reflects the reality of Bitcoin mining and is consistent with our interpretation.
Cryptocurrency may become an exempt supply
The Department of Finance released draft legislation on May 17, 2019, to amend the definition of “financial instrument” for the purposes of the Goods and Services/Harmonized Sales Tax (GST/HST). The definition of a financial instrument is a crucial component for many exempt financial services under the Excise Tax Act. The amendment introduces a new category of financial instrument called “virtual payment instrument,” referring to property that is a digital representation of value, that functions as a medium of exchange, and that exists only at a digital address of a publicly distributed ledger. The virtual payment instrument category does not include property that:
- confers a right, whether immediate or future and whether absolute or contingent, to be exchanged or redeemed for money or specific property or services, or to be converted into money or specific property or services;
- is primarily for use within or as part of a gaming platform, an affinity or rewards program, or a similar platform or program; or
- is prescribed property.
This proposed amendment to exempt cryptocurrency transactions is a mixed blessing. On one hand, the sale, exchange or usage of cryptocurrency will be exempt from GST/HST. On the other hand, classification as an exempt supply may limit the ability to claim full input tax credits on related expenditures. A further concern exists for those persons whose principal business is a trader, dealer, broker or salesperson of virtual currency, as they could be classified as financial institutions. A financial institution is subject to the same obligations as other GST/HST registrants. However, there are many additional obligations that might also apply. As a result, GST/HST compliance for financial institutions is much more complicated than with other sectors.
The proposed amendment does not deal with cryptocurrency mining and has not yet been introduced as a bill in the House of Commons, leaving the possibility for further changes to the original draft. As it is currently drafted, the effective date of the proposed legislation would be May 18, 2019.
Cryptocurrency and CRA audit activity
With the increase in understanding and acceptance of cryptocurrencies by the general public comes an increase in potential tax evasion and avoidance. The CRA has identified the growing global use of cryptocurrencies as a leading risk to increased activity in the underground economy, and has produced a lengthy questionnaire designed to collect information on a number of cryptocurrency transactions, including:
- personal investing or trading;
- accepting cryptocurrency as payment; and
- virtual teller machines.
Be aware that CRA is actively investigating ways to uncover unreported cryptocurrency transactions.
Additional guidance from the CRA
In June 2019, the CRA released two additional publications titled “Guide for cryptocurrency users and tax professionals” and “Virtual Currency.” These publications, which were released prior to the August 8, 2019, technical interpretation, are basic and simply reiterate the CRA’s previously published positions documented in the 2013 and 2014 technical interpretations. They do not reflect the CRA’s revised position on cryptocurrency mining, nor do they factor in the proposed amendment to the definition of financial instrument under the Excise Tax Act.
Cryptocurrency markets and business models are evolving at a rapid pace and the CRA is not keeping up with the changes. CRA has provided little guidance to date, and some of the guidance published in 2019 is already considered obsolete.
To provide some assistance, we have summarized in the table below the technical positions regarding cryptocurrency that have been provided by the CRA since 2013.3 We have also indicated where there has been a change in the CRA’s original position.
|Technical interpretation||Topic|| CRA|
|2018-0776661I7(August 2, 2019)||Mining||Mining is considered a service and the value of the service must be included in income at the time Bitcoin is earned.The value of income equals the value of the service rendered or the value of Bitcoin received, whichever is more readily valued. In most cases, this will be the value of Bitcoin received.|
|2014-0525191E5(March 28, 2014)||Various||It is a question of fact whether mining is a personal endeavor or is done in a commercial-like manner (Stewart v. The Queen, 2002 SCC 46).If it is done in a commercial-like manner, the taxpayer’s income from business is determined through its value of inventory under s. 10 of the Income Tax Act. (See TI 2018-0776661I7 for a more recent technical position.)If it is recorded as inventory in a commercial-like manner, there are three inventory valuation methods:each inventory item valued at lower of cost and FMV at end of year;entire inventory valued at FMV at end of year; orif an adventure or concern in the nature of trade, valued at cost.It is a question of fact whether it is held as inventory or capital property.For property stolen or lost, refer to IT185R “Losses from Theft, Defalcation, or Embezzlement.” (IT185R has been updated to folio – S3-F9-C1 “Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime.”)Treatment of voluntary payments:Gift → no implications to recipientEmployee gift → gift to employee included in employee’s incomeBusiness gift → gift to business included in businesses’ income|
|2013-0514701I7(December 23, 2013)||Various||A virtual currency not considered to be a currency issued by the government of a country is treated as a commodity.Using virtual currency to purchase goods or services is treated as a barter transaction.A gift to a qualified donee is equal to the fair market value of the Bitcoin when transferred.Trading or selling Bitcoins is treated like a gain or a loss on account of income or capital, depending on the facts of the situation. (See IT-479R “Transactions in securities.”)|
|2014-0561061E5(April 16, 2015)||Specified foreign property||Digital currency would be specified foreign property if it is situated, deposited or held outside of Canada and not used or held exclusively in the course of carrying on a business.Interest in a partnership that owns or holds specified foreign property is considered specified foreign property unless the partnership is a specified Canadian entity under 233.3(1) of the Income Tax Act.|
Information is current to January 28, 2020. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.