Bitcoins as "Property" for Tax Purposes
Everyone agrees: the CRA (CRA document no. 2013-0514701I7), foreign tax authorities (IRS Notice 2014-21), and many commentators
tell us that bitcoins are property—a position that is intuitive and
avoids many potentially inappropriate results. However, if the Canadian
tax consequences of arrangements flow from the nature of the legal
relationships involved (see, for example, Shell Canada,  3 SCR 622,
at paragraph 39), one might wonder about the theoretical basis of the
CRA's commendably pragmatic position, given bitcoin's (and certain other
cryptocurrencies') apparent lack of legal structure.
At a high level, and omitting technological details, bitcoin's operations can be summarized as follows:
Explicit legal relationships are not evident: no one is required to run
any particular software in any particular way, and no one is required to
agree with or respect any particular results of the system. The fact
that the participants keep running the same software (and that bitcoin
holdings have any stability) is more in the nature of a social custom.
But customs can change, and for some cryptocurrencies such changes in
custom have at times been dramatic.
(However, we believe that different conclusions might be reached for
taxpayers that hold bitcoins through a cryptocurrency exchange rather
The bitcoin system operates through many computers owned by
unrelated people who have independently chosen to run software that
follows a common set of rules.
By following the rules in the software, the computers communicate
with each other, and all of them reach a common conclusion about who
"holds" which bitcoins from time to time. (The data structure in which
this information is stored is normally referred to as a "blockchain.")
Bitcoins themselves do not have any independent existence and are simply, by definition, whatever it is that this system tracks.
To hold bitcoins is, essentially, to know certain secret
information that, according to the rules of the system, allows a holder
to cause the bitcoins to be transferred to other persons.
One might wonder whether the apparently customary (rather than legal)
nature of bitcoins implies that they are not property. If we were to
accept that bitcoins are not property, anomalous results would follow:
for example, a taxpayer who holds bitcoins might not be subject to a
deemed disposition upon emigration or death; a taxpayer who mines
bitcoins might not create inventory or realize income before the
bitcoins' sale to a third party; and the making of payments with
bitcoins might be viewed as a type of service. Indeed, for GST/HST
purposes, a service could be nearly anything that is not property or
money (whether bitcoins can be money is a separate question not
addressed here), with implications for whether a cross-border supply of
bitcoins is or is not zero-rated.
To avoid creating such anomalies, courts might be particularly diligent
in seeking out legal relationships not evidenced in written agreements
or other familiar ways. For example, some form of legal right might be
found in the patterns of conduct and the expectations of reciprocal
reactions that make up the bitcoin system, or in the protection of
secret information associated with the holding of bitcoins. (But query
whether such rights to secret information would satisfy the Manrell (2003 FCA 128)
condition that property involve "some exclusive right to make a claim
against someone else"—and note also that the transferring of bitcoins
does not actually involve the transferring of the original holder's
We are not sure whether the CRA based its statements on an implicit
finding of underlying legal substance that justifies bitcoins' status as
property, or whether the CRA simply acceded to the practical reality
that bitcoins are now thought of by everyone firmly in property terms—as
being "bought" and "sold," "owned" and "stolen." The latter possibility
may be the most interesting, because it suggests the CRA's willingness
(or perhaps its need) to show flexibility in adapting to the economic
realities of new technologies that may transcend the need for
traditional legal structures and relationships.
Ian Caines and Zvi Halpern-Shavim
Blake Cassels & Graydon LLP, Toronto