Bitcoin: Taxation Unclear
How can business transactions and activities be taxed in respect of
an online currency that it is not government-issued or regulated by a
central political or banking authority? This is just one of many tax
questions that arise in respect of the bitcoin, a virtual currency
created in 2009 by an anonymous computer programmer using the pseudonym
Bitcoins may be acquired in one of three ways: (1) through an online
process known as "mining"; (2) by purchase from an online exchange; and
(3) as a gift or a means of payment. Bitcoin miners use computer
software to solve complex mathematical equations and in return are
rewarded with newly "unearthed" bitcoins.
Bitcoin transactions are intended to be as nearly anonymous as
possible. Users are identifiable only by a computer code, which may
change for each transaction and is not associated with any personal
information, such as a name or address. Thus, the bitcoin offers
cash-like privacy in electronic form and consequently is alleged to be
frequently used in the criminal marketplace. Its commercial legitimacy
is further undermined by its wild fluctuations in value. The first
bitcoin valuation crash occurred in 2011; in the second crash in early
2013, the value of one bitcoin dropped by 50 percent in a single day.
Market rates differ among the various independent online exchanges at
any given time. Interestingly, Germany recognizes the bitcoin as a "unit
of account"; Thailand, by contrast, has banned trade in the virtual
Importantly, there remains the question of how, if at all, bitcoin
transactions may be taxed. Even bitcoin.org has posted a warning to
bitcoin users: "Bitcoin is not an official currency. That said, most
jurisdictions still require you to pay income, sales, payroll, and
capital gains taxes on anything that has value, including Bitcoin."
The CRA has yet to issue any technical interpretations or rulings on
the topic, but the CBC has reportedly been told that a bitcoin
transaction would be subject to tax in the following ways (CBC News,
"Revenue Canada Says BitCoins Aren't Tax Exempt," published April 26,
Bitcoins traded in exchange for goods or services will be subject to the rules governing barter transactions (see Interpretation Bulletin IT-490, "Barter Transactions")--the taxpayer must include in income the FMV of bartered goods or services received in return.
Any gains or losses that arise when bitcoins are bought or sold as a commodity may be income or capital.
Although the CRA's reported comments regarding the bitcoin are
instructive, other tax consequences are still uncertain. For example,
how do the foreign currency rules apply to bitcoin transactions? How
will an employer withhold and remit amounts from an employee's wages
paid in bitcoins? Will a bitcoin miner be earning income when it
unearths bitcoins, or will taxation be deferred until the bitcoins are
converted to a government-issued currency or exchanged for other goods
or services (if the mining of bitcoins is taxable at all)? The answers
to these questions may also have tax implications for virtual currencies
used in multiplayer online games, such as World of Warcraft and Second Life. For now, the taxation of the bitcoin and other virtual currencies remains unclear.
Dentons Canada LLP, Toronto