The Canadian Bar Insurance Association
Tax

Profit on sale of bitcoins reportable to CRA

Even though bitcoin is bought and sold in cyberspace, any gains realized on a digital currency transaction must be reported to the Canada Revenue Agency (CRA), Canadian tax lawyer David J. Rotfleisch tells BNN.

“The Canadian tax system is one of self-assessment. So, if you are engaged in any type of transaction generating revenue — capital gains or income — you are required to report it. So, there’s no difference between gold and cryptocurrency. If you buy gold and you sell gold, you have a profit, you declare it. If you buy cryptocurrency, you sell cryptocurrency, you have to declare what your gains are,” explains Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation.

“The taxman has to get his piece, anytime there is a taxable transaction, which can be on the sale of bitcoins," he adds.

While some may question how the CRA would know about a digital currency transaction, Rotfleisch says that is akin to asking ‘if I do this, will I get away with it?’

“Maybe you will, maybe you won’t. But are you prepared to take that chance?” he says.

More specifically, Rotfleisch tells BNN that the U.S. IRS is already using software that can track the blockchain to find out who the originator of the bitcoin was, as well as anybody who owned any part of it in the intermediate stages.

“There is software out there already that allows tax authorities to determine what is happening and to track individual bitcoins.

“Every aspect of the coin, since it was mined, is tracked in the blockchain. So that, if you have the software to track that, that information is available to the tax authorities," he says.

In addition, Rotfleisch says a number of the bitcoin wallet suppliers have released their records to the IRS without hesitation.

"So, it's quite clear that the IRS is aware of and is investigating cryptocurrency, and where the IRS goes, Revenue Canada tends to follow.”

Those who are currently holding bitcoin or another cryptocurrency in their portfolio but haven’t engaged in any transactions will not have a reporting requirement at the end of the year, says Rotfleisch.

However, he adds, amid the current fear that there is a bubble in the market, Rotfleisch says he has “no doubt that a lot of people are thinking of hedging their bets and selling some of their bitcoins.

“Our office is actually getting calls, literally on a daily basis, asking about the taxation of bitcoins. And anybody who decides to sell, to hedge their position or to get into other competing currencies, will have a taxable transaction and that will be either a capital gain or an income account, depending on whether or not it is an isolated transaction or they’re in the business of doing these types of transactions.”

Ultimately, Rotfleisch tells BNN that if the digital currency has gone up in value, there is no strategy that is going to shelter a taxable gain, other than a corporation in certain instances.

“We have a client right now that we’re exploring that possibility for, they have fairly sophisticated investments in bitcoins and some other digital currencies, so a corporation probably makes sense,” he says.

“There are also other aspects to bitcoins such as miners or noteholders, which have different tax implications and those are easier to put into a corporation and shelter the income in a corporation because that is arguably going to be active income," adds Rotfleisch.

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