Cryptocurrency Mining as a Service
The CRA treats cryptocurrency mining as an activity that generates or
produces inventory—namely, the cryptocurrency (CRA document no.
2014-0525191E5, "Virtual Currencies (Bitcoins)," March 28, 2014).
Accordingly, the mining of a cryptocurrency generates business income
only when the cryptocurrency is sold. An alternative view—that
cryptocurrency mining is a service provided by the miner to the
blockchain network—produces very different tax results.
The function of cryptocurrency mining in the blockchain ecosystem is to
provide computing power to the network in order to verify and record
transactions on the blockchain. This function is in the nature of a
service that the miner provides to the blockchain network in exchange
for the cryptocurrency compensation. Further, the blockchain network
could be recognized as a service recipient—either as an unincorporated
association of participants (who are identifiable) or as a stand-alone
organization. Most tax authorities currently reject this view (see, for
example, the German Federal Ministry of Finance and the Australian Taxation Office).
The tax implications of this view depend, in part, on whether one
considers cryptocurrency a commodity or a currency. Although the CRA has
viewed it as a commodity, this issue is in flux: at the March 2018
Canadian Bar Association round table, the CRA said (at question 7) that
it is considering whether payments in cryptocurrencies could be an
exempt supply of a financial service (that is, of money or similar
instruments) for the purposes of the GST/HST.
There are several implications for the cryptocurrency miner if its activities are viewed as the rendering of a service:
For the blockchain itself, the question posed by the view of mining as a
service is whether the blockchain is a person capable of being
GST/HST-registered, or even a person subject to income tax. This
question will become more relevant as we see further attempts at
creating organizations in which decentralized control over operations is
run entirely by smart contracts—the DAO (decentralized autonomous organization) being one well-known and unsuccessful example.
- At the time the service is rendered by the miner, there will be
immediate revenue recognition. This differs from the CRA's current view,
which delays revenue recognition until the cryptocurrency is sold. The
amount of revenue depends on one's view of cryptocurrency: if it is a
currency, the revenue is the value of the cryptocurrency; if it is a
commodity, the revenue is the FMV of the service being provided. The
latter value will be difficult to measure, but it should be at least
equal to the electricity costs incurred; since these are variable costs
in economic terms, a miner not getting at least that much revenue in
return would shut down.
- Miners can argue for capital gains treatment of any increase in the
value of the currency between the time that it was generated and the
time of its disposition (using the criteria in Interpretation Bulletin
IT-479R, "Transactions in Securities," February 29, 1984). This
situation-specific result will apply regardless of whether the
cryptocurrency is a commodity or a currency. In the CRA's current view, a
sale of cryptocurrency attracts income treatment (as a sale of
- The mining service will not be a taxable supply for GST/HST
purposes—at least, if the cryptocurrency is viewed as a currency,
because it will be an exempt supply of a financial service. (For a
discussion of the outcome when the cryptocurrency is viewed as a
commodity, see "Making or Accepting Payment in Crypto: A GST/HST Risk?" Canadian Tax Focus, February 2018.)
Gowling WLG LLP, Montreal