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CRA: Bitcoins may be Specified Foreign Property

The CRA recently provided its views on whether digital currency, including Bitcoins, are considered “specified foreign property” under the foreign property reporting rules in section 233.3 of the Income Tax Act.

See our previous posts on the tax treatment of Bitcoins and digital currency here, here and here.

Under the foreign property reporting rules in the ITA, if a Canadian taxpayer owns certain foreign property the aggregate cost of which exceeds $100,000 CDN, the taxpayer must file a Form T1135 on which the amount of “specified foreign property” is reported. “Specified foreign property” is defined in subsection 233.3(1) to include certain tangible or intangible property held outside Canada (subject to several exceptions – i.e., that the property is not held or used exclusively in carrying on an active business).

In CRA Document No. 2014-0561061E5 “Specified Foreign Property” (April 16, 2015), the CRA was asked whether digital currency or an interest in a foreign partnership holding digital currency are specified foreign property.

The CRA stated that, in its view, digital currency would be funds or intangible property, and would be specified foreign property if situated, deposited or held outside Canada and not used or held exclusively in the course of carrying on an active business.

Further, an interest in a partnership that owns or holds specified foreign property would itself be specified foreign property unless the partnership was a “specified Canadian entity” (i.e., a partnership wherein the total of all non-resident members’ shares of the income or loss of the partnership for the fiscal period is less than 90% of the total income or loss of the partnership for the period).

The CRA stated that, in this case, the digital currency would likely be specified foreign property and the partnership interest would be specified foreign property of the Canadian corporate owner.

This is helpful guidance from the CRA on the tax treatment of digital currency and a reminder of the many tax issues that arise in respect of digital currency and the reporting of foreign property.

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CRA: Bitcoins may be Specified Foreign Property

Regulation of Bitcoin Around the World

Governments and tax authorities continue to develop their fiscal and tax positions relating Bitcoins. Many countries are releasing warnings about the risks associated with the use of Bitcoins, with some providing more concrete guidance on regulation and tax treatment of the digital currency.

Earlier this year, the United States Law Library of Congress surveyed over 40 countries for their official stances on Bitcoin to determine whether and how Bitcoins are used, regulated and taxed in those foreign jurisdictions. Most of the comments addressed three main themes: Bitcoin’s status (or lack thereof) as legal tender, consumer protection, and taxation.

Most notable in the survey are China and Brazil: Both countries have imposed significant regulations with respect to Bitcoins. In China, Bitcoins are treated as a special virtual commodity. It is not considered a currency, and banks and payment institutions are prohibited from dealing in Bitcoin. Brazil enacted a law in late-2013 that has created the possibility of normalization of electronic currencies like Bitcoin. The law lists the principles that must be observed by the payment arrangements and institutions, according to the parameters to be established by the Brazilian Central Bank.

Brazil stands alone with its Bitcoin regulation amongst its Central and South American counterparts. Neighboring jurisdictions have not provided for any formal regulation of the virtual currency despite its increased use. In Chile, a group of American Libertarians founded an organic farming community with an economy based on Bitcoins. In Nicaragua, an American banker bought a plot of land in one of the most important tourist areas in the country for 80 Bitcoins (roughly USD $72,000 at the time) and has since been encouraging the adoption of Bitcoin.

The United Kingdom announced that it will treat Bitcoins like any other form of payment for tax purposes: Value Added Tax will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoins. The European Union (EU) has passed no specific legislation relative to the status of the Bitcoin as a currency. In France, Germany, Finland and Estonia, the authorities have stated that Bitcoin is an alternative means of payment but not an official currency, and as a result revenues generated are subject to taxation.

The Central Bank of the Russian Federation stated that services of Russian legal entities aimed at assisting the exchange of Bitcoins for goods, services, or currencies are a “dubious activity” associated with money laundering and terrorism financing. The statement recommended that Russian individuals and legal entities refrain from transactions involving Bitcoins. Similarly, the Reserve Bank of India issued a public notice to users, holders and traders of virtual currencies (including Bitcoins) regarding the potential risks, financial and otherwise, to which they are exposed. Following the advisory, India’s largest Bitcoin trading platform suspended its operations, citing the notice.

At present, Hong Kong has no legislation directly regulating Bitcoins and other virtual currencies. However, existing laws provide sanctions against unlawful acts involving Bitcoins, such as fraud or money laundering. Singapore has reportedly published tax advice with respect to Bitcoins, noting that the digital currency is not considered a good nor does it qualify as currency but will be assessed under the Goods and Services Tax. Malaysia and Japan have not issued statements regarding Bitcoins.

As for the countries not surveyed by the United States or countries that have yet to take an official position on Bitcoins, time will tell as to how the digital currency will be adopted and integrated in different jurisdictions.

For now, the regulatory and tax discussions are as young as the currency. As Bitcoin use and acceptance increases, fiscal and tax authorities will face a more complex debate that will demand more than simply providing public warnings of the risk of Bitcoin use.

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Regulation of Bitcoin Around the World

Bitcoin Users Face Regulatory “Patchwork”

In the International Tax Review, Laura Gavioli (of Dentons’ Dallas office) and I discuss the Canada and U.S. approaches to the regulation and tax treatment of Bitcoin currency. We also discuss the approach taken in several other jurisdictions around the world.

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Bitcoin Users Face Regulatory “Patchwork”

More Guidance from the CRA on Bitcoin Activities and Transactions

Following the recent IRS publication on the U.S. tax treatment of bitcoin activities and transactions, the CRA has issued further guidance on the Canadian tax issues arising in respect of the virtual currency.

In CRA Document No. 2014-052511E5 “Virtual Currencies (Bitcoins)” (March 28, 2014), the CRA was asked several questions about bitcoin activities and transactions (not all of the underlying facts are described in the technical interpretation, but we can infer what the taxpayer asked from the responses provided by the CRA).

Bitcoin Mining Business?

In respect of bitcoin “mining“, the CRA noted the difference between business and personal activities. In Stewart v. The Queen (2002 SCC 46) the Supreme Court of Canada stated that an activity may be commercial in nature if the taxpayer had a subjective intention to profit and there was evidence of business-like behaviour supporting such intention. Whether a particular activity is undertaken for profit is a question of fact that can only be determined on a case by case basis. The CRA stated that, in this case, the taxpayer appeared to be operating a bitcoin mining business.

If a taxpayer mines bitcoins in a commercial manner, the taxpayer’s income for the year will be determined with reference to the property in the taxpayer’s inventory at the end of the year. The rules for determining the value of inventory are described in section 10 of the Income Tax Act and Part XVIII of the Income Tax Regulations, and in most cases will be either (i) the value of the inventory at the end of the year at its cost or fair market value (whichever is lower) or (ii) the value of the inventory at the end of the year at its fair market value (this requires a determination of whether or not the business activity is an adventure or concern in the nature of trade). In certain cases, other methods of valuing inventory may be available (see Interpretation Bulletin IT-473R “Inventory Valuation” (December 21, 1998)).

Theft / Losses

The CRA also noted that a loss of trading assets (i.e., inventory or cash) through theft or embezzlement is normally deductible in computing income from a business if such losses are an inherent risk of the business and the loss is reasonably incidental to the business activities. The amount of the loss would be the cost of the property less any insurance proceeds. Stolen capital property may result in a capital loss (see Interpretation Bulletin IT-185R “Losses from Theft, Defalcation or Embezzlement” (March 9, 2001)). This is interesting, given the recent difficulties encountered by the Mt. Gox bitcoin exchange, which in February 2014 discovered a theft of more than 700,000 of its bitcoins.

Gifts / Other Income

The CRA added that a gift of a virtual currency would not be subject to income tax in the hands of the recipient (see Interpretation Bulletin IT-334R2 “Miscellaneous Receipts” (February 21, 1992)). However, where a taxpayer receives a voluntary payment from an employer or another person in connection with employment, the payment may be taxable as employment income under section 5 or as a taxable benefit under paragraph 6(1)(a) of the Income Tax Act. Further, voluntary payments received in connection with a business must be included in the taxpayer’s income from that business.

Barter Transactions

Finally, the CRA stated that, where one type of virtual currency is exchanged for another type of virtual currency, the value of the goods or services received by the taxpayer must be brought into the taxpayer’s income if they are business-related (see Interpretation Bulletin IT-490 “Barter Transactions” (July 5, 1982)).

The CRA suggested that Canadian taxpayers should review the CRA’s fact sheet, “What you should know about digital currency” (November 2013).

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More Guidance from the CRA on Bitcoin Activities and Transactions

IRS: Bitcoin Not a Currency for Tax Purposes

As expected, the U.S. Internal Revenue Service has provided some guidance on the U.S. tax treatment of Bitcoin.

In Notice 2014-21 (March 25, 2014), the IRS stated that Bitcoin is property and not currency for tax purposes.  According to the Notice, “general tax principles applicable to property transactions apply to transactions using virtual currency.”  Some of the U.S. tax implications of Bitcoin include the following: (1) taxpayers receiving Bitcoins as payment for goods or services must include in their gross income the fair market value of the Bitcoins; (2) taxpayers will have a gain or loss upon the exchange of Bitcoins for other property; and (3) taxpayers who “mine” Bitcoins must include the fair market value of the Bitcoins in their gross incomes.  The IRS also confirmed in its statement that employment wages paid in Bitcoins are taxable.

This guidance from the IRS accords with the positions taken by tax authorities in other jurisdictions.

Commentators have considered the tax implications of Bitcoin in Canada both before and after the CRA released its most recent guidance in CRA Document No. 2013-0514701I7 “Bitcoins” (December 23, 2013).

The Canadian government has taken the position that Bitcoin is not legal tender. The Canada Revenue Agency has stated that, when addressing the Canadian tax treatment of Bitcoin, taxpayers must look to the rules surrounding barter transactions and must consider whether income or capital treatment arises on Bitcoin trading (i.e., speculating on the changes in the value of Bitcoins).

While Bitcoin currency exchanges encounter uncertainty (or fail entirely), and Bitcoin prices continue to fluctuate, the global tax implications of Bitcoin are becoming clearer.

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IRS: Bitcoin Not a Currency for Tax Purposes

Bitcoins: More Guidance from the CRA

Tax authorities around the world continue to wrestle with the tax issues arising from the use and sale of Bitcoin currency. Sweden recently announced that it will treat Bitcoin as an asset, and Finland has stated that it will treat Bitcoin as a commodity. China has placed restrictions on the use of Bitcoin. Generally, the price fluctuations and uncertainties around the use and sale of Bitcoins seemed to have generated more questions than answers.

In Canada, the use of Bitcoin currency appears to be gaining popularity Bitcoin ATMs have popped up in several cities, and various retailers and even some charities are accepting Bitcoins for payments or donations. However, the Canadian government apparently does not consider it a currency. The Canadian tax implications of Bitcoin transactions have been considered by the CRA and tax professionals, and now the CRA has published some additional guidance on the subject.

In CRA Document No. 2013-0514701I7 “Bitcoins” (December 23, 2013), the CRA summarized its views on how certain transactions involving the use or sale of Bitcoins may be taxed under the Income Tax Act and Excise Tax Act.

Buying and Selling Goods or Services in Exchange for Bitcoins

The CRA stated that the use of Bitcoins to purchase goods or services would be treated as a form of barter transaction (see, for example, Interpretation Bulletin IT-490 “Barter Transactions” (July 5, 1992)). The CRA’s view is that each party to a barter transaction has received something that is equal to the value of whatever is given up. For Canadian tax purposes, if a business sells goods or services in exchange for Bitcoins, that business must report its income from the transaction in Canadian dollars (i.e., the fair market value of the Bitcoins at the time of the sale). GST/HST would be applicable on the fair market value of the Bitcoins that were used to pay for the goods or services.

Donation of Bitcoins

The CRA stated that, if Bitcoins are transferred to a qualified donee, the fair market value of the Bitcoins at the time of the donation must be used in determining the value of the gift for tax purposes (see also CRA Pamphlet P113 “Gifts and Income Tax”). The determination of the fair market value is a question of fact.

Buying and Selling Bitcoins

The CRA stated that the trading or sale of Bitcoins like a commodity (i.e., speculating on the changes in the value of Bitcoins) may result in a gain or loss on account of income or capital. This determination can only be made on a case-by-case basis and on the specifics facts of each situation (see, for example, Interpretation Bulletin IT-479R “Transactions in Securities” (February 29, 1984)). Generally, the income tax consequences relating to the tax treatment of gains or losses arising from the purchase and sale of Bitcoins would be the same as for transactions involving other types of commodities.

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Bitcoins: More Guidance from the CRA