Introduction – Cryptocurrency Transactions and Taxation
Cryptocurrency is a popular means of conducting transactions online. Widespread cryptocurrency tokens such as Bitcoin, Ethereum, Litecoin, Dash, and Stellar have become acceptable payment currencies for some e-commerce merchants across the world. For Canadian businesses that are looking to accept cryptocurrencies for payments of their goods and services, it is important to be aware of the potential tax compliance pitfalls and resulting potential tax liabilities and tax penalties.
This article will go over what a barter transaction is and why the CRA considers transactions involving exchanging cryptocurrency for goods and services to be barter transactions. The income tax and excise tax (GST/HST) implications of treating these transactions as barter transactions will be analysed. We will also discuss what to do when you have not been reporting your cryptocurrency transactions correctly.
Tax Definition of Barter Transaction.
A barter transaction is not defined under the Income Tax Act or Excise Tax Act. Nevertheless, barter transactions will always give rise to both Canadian income tax and GST/HST tax obligations. In the CRA’s view, a barter transaction is effected when any two persons agree to a reciprocal exchange of goods or services and carry out that exchange usually without using money. In a barter transaction between persons who are dealing with each other at arm’s length, 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. However, this does not mean the goods and services that are being exchanged in a barter transaction have the same fair market value for tax purposes.
In the case of cryptocurrency, the CRA currently considers cryptocurrency a commodity and not a currency under the Income Tax Act and Excise Tax Act. Canadian courts have not ruled on whether the CRA’s position is correct.
Under CRA’s current position, any transaction where cryptocurrency is exchanged for goods or services or for another commodity is considered a barter transaction by the CRA under the Income Tax Act and Excise Tax Act. Compared to cash transactions, use of crypto currency as a payment method has major tax implications for Canadian businesses and cryptocurrency users as a result of the transaction and therefore in how to report their tax liabilities.
Cryptocurrency Barter Transactions and the Income Tax Act
When cryptocurrency payment is accepted in exchange for goods and services, the proceeds of the transaction for the seller will be the fair market value of the cryptocurrency received at the time of the transaction.
It is important to keep in mind the Income Tax Act deems the proceed of the transaction to be the fair market value of the cryptocurrency received at the time of the transaction even if the seller does not immediately dispose the cryptocurrency. If the seller holds on to the cryptocurrency tokens received in the initial transaction and disposes these tokens later either for cash or during another barter transaction, then any rise and fall in the price of these cryptocurrency tokens will result in taxable gains or losses separate and apart from the original barter transaction.
Furthermore, a barter transaction involving cryptocurrency can nevertheless give rise to capital gains as opposed to income based on the existing factors from Happy Valley Farm. Please see our article here https://taxpage.com/articles-and-tips/a-guide-to-adventure-or-concern-in-nature-of-trade/ for further analysis on the income tax characterization between capital gains and income.
Cryptocurrency Barter Transactions and the Excise Tax Act (GST/HST)
Barter transactions involving cryptocurrency can also give rise to the obligation to collect and remit GST/HST under the Excise Tax Act. Keep in mind that a supplier with less than $30,000 total supply for four consecutive calendar quarters is considered a small supplier under the Excise Tax Act and is exempted from registering a GST/HST account with the CRA and collecting GST/HST.
When the seller in a barter transaction involving cryptocurrency is not exempted from collecting and remitting GST/HST, the seller must remit GST/HST based on the fair market value received for the cryptocurrency at the time of the transaction. The seller in this case should not collect, remit and report his or her GST/HST based on the fair market value of the goods or services sold in these barter transactions. Note that the obligation to remit GST/HST is in Canadian dollars even though no Canadian dollars were received as part of the crypto currency transaction.
A buyer paying with cryptocurrency can also be entitled to Input Tax Credit when that buyer meets the criteria for claiming Input Tax Credits under the Excise Tax Act. A registrant is entitled to an input tax credit equal to the amount of tax actually paid. So if 13% HST was paid the purchaser is entitled to an input tax credit for that amount.
Voluntary Disclosure and Crypto Currency
Cryptocurrency barter transactions will introduce added complexities in Canadian taxpayer’s tax reporting and tax compliance obligations. Canadian taxpayers’ tax reporting is further complicated by the lack of legislative guidance in either the Income Tax Act or Excise Tax Act.
Canadian taxpayers are nevertheless required to stay compliant with the Income Tax Act and Excise Tax Act for their barter transactions including those involving cryptocurrency. For Canadian taxpayers who have not been compliant, they could potentially incur costly interest and penalties upon future CRA assessments. These taxpayers may want to consider taking advantage of CRA’s voluntary disclosure program.
The general eligibility criteria for CRA’s voluntary disclosure program (VDP) are the following:
- Voluntary: the CRA must have no prior knowledge about the taxpayer’s tax owing.
- Complete: the taxpayer must disclose tax information on all tax years in which his or her filings were inaccurate.
- Tax Owing: the taxpayer must owe tax to the CRA due to inaccurate filings.
- One Year Past Due: the taxpayer can only disclose information for tax years that is at least one year past the filing due date.
When a taxpayer is potentially non-compliant under the Income Tax Act, even if the taxpayer is not currently under investigation or audit by the CRA, he or she may fail to satisfy the “Voluntary” criteria of the VDP if CRA was able to compel his or her tax information from a third-party during the course of investigating another taxpayer.
Our expert Toronto tax lawyers can provide tax guidance on the complex issues regarding your cryptocurrency transactions and a voluntary disclosure application may be beneficial for you if you are off-side your crypto currency tax filing obligations, including the obligation to file a form T 1135 specifying your crypto currency holdings. Our experienced certified Specialist in taxation Canadian tax lawyer and members of the team also have extensive experience with representing taxpayers during CRA tax audits, objection and tax court appeals. We are going to defend your rights in all dealings with the CRA. All consultations with our students and experienced Canadian tax lawyers will be confidential whether you choose to retain us or not.
You cannot pay your Canadian taxes with cryptocurrency. Any third party purporting to be the CRA and demanding payments in cryptocurrency is a scammer.
As of January 2022, no such reporting requirement has been put in place by the Canadian government. Although such reporting requirement may soon be implicated considering the US government has imposed a cryptocurrency reporting requirement for all US taxpayers. However, cryptocurrency may qualify as specified foreign property and you will need to report it on your form T1135 if the total cost amount of your specified foreign property exceeds $100,000.