El Salvador announced earlier this month that it was legalizing bitcoin. This is the 1er country to take the plunge, in general skepticism. Even Salvadorans do not believe it, so much so that they protest in the streets for the state to back down.
Could this desperate initiative by the Central American country affect the tax treatment of gains made with bitcoin here in Canada?
Reader Mario thinks so. Here are his arguments:
“According to Revenu Québec, the use of virtual currency is considered a barter transaction when I convert money into cryptocurrency. This transaction becomes taxable. In my opinion, this is no longer the case since El Salvador adopted bitcoin as its national currency. “
Note reader is based on these dictionary definitions:
Barter: an economic system that does not use money.
Currency: monetary unit adopted by a State.
“So, concludes Mario, we can no longer invoke a barter operation when converting money into bitcoins, because bitcoin has become the national currency of a state”. Then ?
It does not change anything
Note: for the government, an operation falls under barter when a person buys a good with a cryptocurrency, or when they exchange a cryptocurrency for another. Bitcoin and other virtual currencies are considered commodities.
Now, a comment: with all due respect for our reader and the Salvadorians: I have the impression that the Canada Revenue Agency (CRA) and Revenu Quebec don’t give a damn about what is being decided in El Salvador.
That the government of this country has legalized bitcoin says more about the instability of its economy than the credibility of cryptocurrencies.
Whether or not they are “barter transactions” is irrelevant. Note that profits made on currency trading are also subject to capital gains tax. It would be the same with a bitcoin that would become a widely recognized official currency.
If you successfully bet on a devaluation of the Canadian dollar by filling up on US dollars, for example, you should report a capital gain after reselling your US currency or after acquiring another asset with those greenbacks.
How is bitcoin taxed?
It’s not very complicated, for the majority of people who have bought cryptocurrency in the hope of making a profit someday, the profit will be treated as capital gain (half of which is taxable) in all of these transactions:
- When you resell your cryptocurrencies (currency conversion);
- When you buy goods using cryptocurrencies (barter);
- When you exchange one cryptocurrency for another cryptocurrency (barter).
- When you die with your cryptocurrencies (presumed disposition on death).
If you make transactions and exchange virtual currencies on a regular basis to supplement your ends of the month, the fruit of this activity will then be considered as business income, taxable at 100%.
BOOKKEEPING
The CRA warned earlier this year that it would step up its checks on cryptocurrency exchanges. The tax authorities recommend that holders of bitcoins and others put this information somewhere:
- The date of the transactions
- Receipts for the purchase or transfer of cryptocurrency
- The value of the cryptocurrency in Canadian dollars at the time of the transaction
- Digital wallet registers and cryptocurrency addresses
- A description of the transaction and the other party
- Trade registers
- Accounting and legal fees
- The costs of software related to the management of your fiscal affairs.
And this does not matter what El Salvador decides.
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