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Are bitcoins real money?

If not, there may be tax consequences.

Steven G. Kelman 10 February, 2014 | 7:00PM
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Mr. Flaherty, I know you're busy preparing your federal budget speech, but I'm hoping you'll clarify something for me in it: Does the Canada Revenue Agency consider bitcoins as a real currency like the U.S. dollar, the pound sterling and the euro? Or is the purchase of bitcoins the same as buying a replacement pack of Monopoly money for sales tax purposes?

The difference of course is that when I buy dollars, pounds or euros I don't pay GST/HST, but if I buy that pack of Monopoly money I pay GST/HST on my $10 purchase price. So, if I buy $500,000 of bitcoins on a bitcoin exchange, am I required to pay GST/HST on my purchase?

According to the CRA website, "Digital currency is virtual money that can be used to buy and sell goods or services on the Internet. Bitcoins are an example of digital currency. Bitcoins are not controlled by central banks or any country, and can be traded anonymously. Bitcoins can be bought and sold in return for traditional currency, and can also be transferred from one person to another."

I have no issue with that part, though I would add a couple of other bits. Unlike currencies issued by a central bank, bitcoins don't have anything backing them, like reserves. Their value, currently around $890 in Canadian funds, is a reflection of supply and demand and nothing else. This differs from real currencies whose values reflect interest rates, money supply, economic forces as well as supply and demand. Also, there does not appear to be any accountability for what happens in the bitcoin market.

You can buy and sell bitcoins on bitcoin exchanges. A few merchants use them, and last week Montreal got its first bitcoin ATM. The first such ATM in Canada was installed in Vancouver last October.

The Quebec securities markets and insurance regulator, the Autorité des marchés financiers has some concerns over the new Montreal ATM. It issued a release warning that bitcoins aren't covered by deposit insurance or the Financial Services Compensation Fund. Quebec will monitor the situation against the Securities Act, the Derivatives Act and the Money-Services Businesses Act and take action if warranted.

Bitcoins are not legal currency. Consequently, any exchange of goods or services paid in bitcoins is a barter transaction. So if you buy something with bitcoins you have to pay GST/HST on the equivalent dollar purchase and the vendor must report the revenue and tax collected on its tax returns.

But what about the initial purchase of bitcoins? CRA says digital currencies can be bought and sold like a commodity, and that any gains or losses are considered taxable income or capital. If you need more information about which is which, CRA tells you to go to Paragraphs 9 to 32 of Interpretation Bulletin IT-479R, Transactions in Securities.

I assume that the CRA doesn't really mean a commodity but a commodity future. The difference is you'll pay GST/HST when you buy some commodities but a commodity future transaction is a financial service for tax purposes and doesn't attract GST/HST. So the question remains, are purchases of bitcoins GST/HST exempt?

I expect it all comes down to whether a digital or cyber currency that is not a legal currency is a financial service and consequently GST/HST exempt. A financial service involves transactions tied to money or a financial instrument like debt or an insurance policy. Maybe we'll find out in the budget where Ottawa stands.

The federal government has had some concerns about bitcoins for a number of years. The April-June 2011 issue of Money Laundering and Terrorist Activity Financing Watch (I'm not making this up) notes that bitcoin transactions are basically untraceable across borders and can be traded through unregulated entities.

There is good reason for those concerns. Last year U.S. authorities closed down, a website called Silk Road that was allegedly selling drugs and guns, among other things. The only form of payment was with bitcoins, and U.S. federal prosecutors said last month that they seized 29,600 bitcoins with an estimated value of US$28 million.

Also in January, U.S. prosecutors charged the vice-chairman of a trade association promoting bitcoins with conspiring to commit money laundering pertaining to Silk Road.

The value of a bitcoin reflects speculative buying, and anyone holding the digital currency could lose their cyber capital when the cyber bubble bursts. The good news is that they can claim a taxable capital loss, which they can use to offset taxable capital gains.

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Steven G. Kelman

Steven G. Kelman  

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