It may seem early to start thinking about filing taxes, but this year's return could be particularly time-consuming for Canadians who have flocked to Bitcoin and other cryptocurrencies, especially those who don't realize they owe the government money.
No need to worry if you've purchased Bitcoin but haven't touched it since. But once that cryptocurrency is translated into a real-world dollar amount — such as when you sell it or use it to buy something — you are on the so-called tax man's radar.
The price of Bitcoin shot above US$19,000 in mid-December, prompting a surge of interest, along with some cautionary advice from officials. Bank of Canada governor Stephen Poloz warned about cryptocurrencies' risks and tax implications the same month.
"Characteristics vary widely but, generally speaking, they can be thought of as securities. The Canada Revenue Agency agrees," Poloz said during a Toronto speech. "That means, if you buy and sell them at a profit, you have income that needs o be reported for tax purposes."
But working out what to declare to the tax man is not that straightforward, experts say.
"There is no exact framework within the income tax act that tells us exactly how Bitcoin is taxable," said Lana Paton, managing partner of PwC Canada’s Tax Services.
The CRA issued a letter in 2013 that stated that Bitcoin and other digital currencies were not considered to be legal tender. Instead, the government agency said, cryptocurrencies are viewed as a commodity. As such, any resulting gains or losses could be taxable income.
But until the gains on that virtual currency are realized — whether that is by selling the digital currency, or using it to make a purchase — those gains are not subject to tax.
"The act of buying Bitcoin or receiving Bitcoin should not be taxable," said Paton. "The act of using Bitcoin, will be taxable."
For example, if you purchased one bitcoin for US$10,000 but sold it last year for $19,000, you will need to declare $9,000 in capital gains.
When cryptocurrencies are used to pay for goods or services, the rules for barter transactions apply.
For example, if a merchant accepted Bitcoin in exchange for a desk, a pair of glasses or jewelry — all items that can currently be bought using Bitcoin — the seller will need to include the fair market value of the good or service sold in their income for tax purposes.
"You are trading one good for another and you uptraded, so you gained in value," said H&R Block senior tax professional Valorie Elgar. "You're supposed to claim that as a capital gain."
GST or HST also apply on the value of any goods or services purchased using cryptocurrencies.
When making a purchase, any gains or losses on the cryptocurrency are considered realized and must be reported, said Paton.
For example, if you bought Bitcoin for US$1 — a price the cryptocurrency hasn't held since 2011 — and used that Bitcoin to buy a new car last year for roughly US$18,700, you would have to declare a capital gain of $18,699.