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The Future Today: Taxing Virtual Currency


​​​​​​​​​​​​​​​​​​​​​​Cryptocurrency is digital or virtual currency that operates on a peer-to-peer network, independent of a government or bank. One of the first types of cryptocurrencies was the bitcoin, which was released in 2009. Since then, numerous other types of cryptocurrencies have entered the market, each with its own technical differences, but generally operating the same way.

For purposes of this article, we will be referring to the bitcoin, however, the tax implications discussed below will generally apply to the different types of cryptocurrencies.

Bitcoins are stored in a holder’s digital wallet and can be transferred from one person to another. However, all transactions are transparent and recorded in blockchains (digitized public ledgers of cryptocurrency transactions), which can be viewed by all bitcoin holders. While bitcoins are created through so-called mining, performed by computers that solve complex algorithms, they can also be purchased and sold in return for traditional currency, traded anonymously, or be used to purchase goods or services.

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Tax Treatment in Canada

Although the Canada Revenue Agency (CRA) has described digital currency to be “virtual money,” it has stated that “virtual currencies, such as bitcoins, are not considered to be currency issued by a government of a country.”2 Instead, the CRA treats such currency to be a commodity for purposes of the Income Tax Act and using currency such as bitcoins to purchase goods or services would be treated as a form of barter transaction3.

Barter Transactions and Taxes

While what constitutes a barter transaction is not defined in the Act, the CRA considers that a barter transaction occurs when parties agree to a reciprocal exchange of goods or services and carry out that exchange, typically without the use of money4. The CRA states “it is a fundamental principle that each of those persons considers that the value of whatever is received is at least equal to the value of whatever is given up in exchange therefor.”5

Where services are bartered, the value of the services must be brought into income to the extent it is provided in the course of earning income from, or are related to, a business or a professional carried on by the taxpayer. Where goods are bartered, the value of the goods must also be brought into income if they are business-related, or it may give rise to a capital gain.

In arm’s length transactions, the amount that is to be brought into income or treated as proceeds of disposition is the amount that is the price which the taxpayer would normally have charged a stranger for the good or service. The cost is the same amount as the value of the goods or services given up, plus or minus any cash involved. The same applies in non-arm’s length transactions, subject to the provisions of section 69 of the Act.6

Exchanges of one type of digital currency to another is also governed by the barter transaction principles above, and the exchange would trigger a disposition for income tax purposes.7

Buying and Selling Bitcoins

The tax treatment of a taxpayer buying and selling bitcoins using traditional currency will either be on account of capital or on account of income. If the bitcoin is considered to be capital in nature, only 50 percent of the gain realized from its sale is taxable as a taxable capital gain. If the bitcoin is viewed to be inventory of a business, any gain realized on a disposition is fully taxable as business income. As the definition of “business” includes “an adventure or concern in the nature of trade,” an isolated transaction may be taxable as business income even though the transaction was not itself in respect of an actual business carried on.

The Act does not describe the circumstances under which a transaction will be treated as being on account of capital or on account of income. The determination is made on the facts of the particular case, but the analysis is the same as for transactions involving other types of commodities. For example, the CRA will consider the frequency of transactions, period of ownership, knowledge, relationship between the transaction and the taxpayer’s business, time spent and financing.8

Options and Rights

Bitcoins can also be obtained by way of options, rights, initial coin offerings (ICOs), forks (events that occur that splits the blockchain of the existing bitcoin and essentially creates a new currency with its own blockchain), etc.

An option is not a defined term in the Act, but it generally means an “obligation to hold an offer open for acceptance until the expiration of a specified time.”9 It is a right of choice, as the option holder is free to decide whether to accept the offer or not, but is not compelled to do so.

Where an option to acquire bitcoins is granted and the option is capital property, section 49 of the Act would be applicable such that the exercise of the option shall be deemed not to be a disposition of property and the cost base of the option is included in computing the cost to the purchaser of the property acquired (i.e. the bitcoins).

The Act, however, is silent as to options acquired as inventory (for example, if the taxpayer is a trader). Presumably, a disposition of the option would be taxable to the option holder on account of income. But it is unclear whether the exercise of such an option would be regarded as a taxable event to the holder given that section 49 seems to only apply to capital property. Moreover, option agreements are deemed not to be inventory of a taxpayer for purposes of section 10 of the Act.10 This means that option agreements are excluded from the application of inventory valuation rules.

In the case of an ICO, a taxpayer pays an amount for the right to acquire bitcoins at a negotiated discounted rate. The bitcoin is not issued until a certain date or event. However, upon the date or event, the bitcoin is automatically issued and the taxpayer does not have the right of choice. As such, this type of right would not be considered an option such that section 49 would apply. Instead, it is more likely the taxpayer prepaid for the right to acquire bitcoins at a discount and the prepayment would be included in calculating the cost base of the bitcoin. There should not be a taxable event until the bitcoins are subsequently sold. However, depending on the circumstances regarding how the right was acquired, certain provisions of the Act may deem the taxpayer to have received a taxable benefit.

Another way of obtaining bitcoins is through a fork. For example, the original bitcoin was subject to a fork, which resulted in the creation of bitcoin Cash. The new digital currency (bitcoin cash) trades under its own symbol and has its own blockchain (or transaction ledger). Upon the bitcoin fork, bitcoin holders were issued a certain amount of bitcoin cash based on their bitcoin holdings.

While the CRA has issued some guidance on digital currency such as bitcoins, labelling it a commodity, it has not issued any guidance as to the treatment of fork events for tax purposes. The Act and case law are also silent on this, as these types of transactions are still very new. Commentators in the U.S. have suggested that the Internal Revenue Service (IRS) would consider the receipt of bitcoin cash as taxable income, likely based on the value of bitcoin cash received. Other commentators have suggested that the bitcoin Fork may be akin to a stock split, in which case there may not be significant tax consequences. However, given that bitcoins and other digital currencies are not shares of a corporation, it would be difficult to confirm that a split of the currency would be treated the same as a stock split for tax purposes. But without more guidance from the CRA or the courts, the tax treatment of these types of transactions remain unclear.

GST / HST Implications

The CRA has not provided detailed guidance on GST / HST implications of digital currency transactions, other than the following comments and example:

“In those transactions where a taxable supply of a good or service is made and the consideration for that supply is bitcoins, the consideration for the supply is deemed to be equal to the fair market value of the bitcoins at the time the supply is made for the purposes of determining the GST/HST payable for the supply.

“For example, if a GST / HST registrant sells a good for 10 bitcoins and the sale is subject to GST / HST, the registrant will be required to collect the GST / HST calculated on the fair market value of the 10 bitcoins at the time of the sale. The registrant will be required to include in its net tax remittance the GST / HST collectible and the recipient, if a registrant, would be eligible to claim an input tax credit for the GST / HST to the extent the good is for consumption, use or supply in the recipient's commercial activities.”11

Tax Implications of Bitcoin Mining

As explained above, bitcoins are created by a process called mining. Whether a particular activity is undertaken for profit or as a personal endeavour is a question of fact. Where a taxpayer mines bitcoin in a commercial manner, the activity will be considered business activity and the valuation of inventory at the end of year is determined by section 10 of the Act.12 However, note that where the mining is considered an adventure or concern in the nature of trade, the inventory is valued at the cost at which it was acquired.13


The CRA expects income from domestic or foreign sources to be reported, even when using digital currency.14 In addition, digital currency is funds or intangible property and would be “specified foreign property” of a person or partnership to the extent that it is situated, deposited, or held outside of Canada and not used exclusively in the course of carrying on an active business.15 This means a taxpayer may have a T1135 filing obligation that would require them to disclose the value of bitcoins owned.

Other Jurisdictions

In the U.S., the IRS provided its views on virtual currency in its Notice 2014-12. In the notice, the IRS provides a number of questions and answers to various issues. For example, the IRS views virtual currency to be property and that the general tax principles applicable to property transactions apply to transactions using virtual currency. Accordingly, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of the virtual currency in computing gross income, and such fair market value is also the tax basis of the virtual currency received as payment for goods or services by the taxpayer.

In the UK, the HM Revenue and Customs (HMRC) considers that cryptocurrencies are unique and cannot be directly compared to any other form of investment activity or payment mechanism and the tax treatment needs to be looked at on a case-by-case basis.16 HMRC states that “depending on the facts, a transaction may be so highly speculative that it is not taxable or any losses relievable. For example, gambling or betting wins are not taxable and gambling losses cannot be offset against other taxable profits.”17


Bitcoins and cryptocurrency in general are still relatively new, in that the determination of their legal and regulatory status is still ongoing. As such, there is still a great deal of uncertainty surrounding the taxation of such currencies.

For more information, contact Jody Wong, JD, TEP​​, at 416.263.6949 or [email protected] or contact Le Van at 416.515.5036 or [email protected]

1. CRA Q&A Release 2013-11-05 – What You Should Know about Digital Currency.
2. CRA View 2013-0514701I7.
3. CRA View 2013-0514701I7.
4. CRA Interpretation Bulletin, IT-490 at para 3.
5. CRA Interpretation Bulletin, IT-490 at para 3.
6. CRA Interpretation Bulletin, IT-490 at para 7.
7. CRA View 2014-0525191E5.
8. CRA Interpretation Bulletin, IT-479R at para 11.
9. Day v. MNR, 71 D.T.C. 723 at para 8.
10. Subsection 10(15) of the Act.
11. CRA View 2013-0514701I7.
12. CRA View 2014-0525191E5.
13. Subsection 10(1.02) of the Act.
14. CRA Q&A Release 2013-11-05 - What You Should Know about Digital Currency.
15. CRA View 2014-0561061E5.
16. Revenue and Customs Brief 9 (2014): bitcoin and other cryptocurrencies.
17. Revenue and Customs Brief 9 (2014): bitcoin and other cryptocurrencies.​