In recent years, digital currencies called "cryptocurrencies" have exploded in mainstream popularity. Cryptocurrencies, such as Bitcoin, Ethereum and Litecoin were once accepted by only a few online vendors, but now may be used as payment at some restaurants, retail stores and even real estate brokers.
What is a cryptocurrency?
A cryptocurrency is a form of digital currency that is decentralized and managed by a peer-to-peer network. Rather than one central organization providing oversight and control of the currency - like a central bank would for its country's legal tender - the control lies with a network of users who confirm every transaction. Once transactions are confirmed by the network, they are posted to a digital ledger called the "blockchain," which is an immutable, publicly-accessible record of all transactions that have taken place. Thanks to the global popularity of cryptocurrencies, this confirmation normally occurs within minutes.
The activity of confirming cryptocurrency transactions and adding them to the blockchain is called "mining." Miners are incentivised to perform these confirmations because they are rewarded with units of the cryptocurrency they mine. (A later Tax Alert will address the complicated area of mining in more detail.) Many investors believe that, since Bitcoin and other cryptocurrencies are not centralized, there are no tax implications to buying, selling or trading them.
The CRA's position
In Canada, the Currency Act defines "legal tender" as coins issued by the Royal Canadian Mint or notes issued by the Bank of Canada. Thus, cryptocurrencies are not considered a form of Canadian currency, but they do not qualify as foreign currency either. The Canadian Income Tax Act defines foreign currency as the currency of any country other than Canada. Since cryptocurrencies are decentralized and therefore not controlled by another country or central bank, they are not considered a currency of any other country.
As a result of these two interpretations, the CRA has determined that cryptocurrencies are a commodity, not a currency. The tax treatments of various transactions using cryptocurrencies are described below.
Buying and selling
The CRA considers the buying and selling of cryptocurrencies to be similar to the buying and selling of regular securities - such as mutual funds or corporate equities - by an investor. Just as an investor must pay tax on a capital gain when they sell a share of a company held in...