CRA notes that bitcoin may be capital property but not personal-use property and that the timing of a loss from fraud may be governed by s. 44(2)

We have finished translating the answers in the (regular) 2023 APFF Roundtable, and will provide a complete translation of the 2023 APFF Financial Strategies and Instruments Roundtable tomorrow evening.

Q.9 of the regular Roundtable described Madame Y, who made a cash purchase of a bitcoin on a central exchange platform in order that she could ultimately pay for items online. Subsequently, the exchange platform was the victim of fraud and Madame Y lost access to her bitcoin. Regarding the character and timing of her loss, CRA indicated:

  • whether a loss was a capital loss or on income account turned on whether she “held the cryptocurrency in the course of a business or as a capital investment” (i.e., like gold (see Harms), its not generating income did not necessarily preclude its being capital property).
  • if the exchange acted as custodian of the cryptocurrency for her, the loss suffered from the fraud would generally be attributed to her.
  • conversely, if the exchange platform was the owner, then her contractual relationship with the exchange platform would need to be examined.
  • “the mere holding of cryptocurrency for future use, i.e., for the purchase of products online, does not make the cryptocurrency personal-use property.”
  • although a loss from fraud usually arises when the loss is recognized, “where the taxpayer has received compensation for capital property unlawfully taken, the specific rules of subsection 44(2) apply to determine the time of disposition” (e.g., if she sued for her loss, it would be recognized when she received an award or her action was settled).

Neal Armstrong. Summaries of 2 November 2023 APFF Roundtable, Q.9 under s. 18(1)(b) – capital expenditure v. expense - damages, s. 54 – proceeds of disposition – (b) and s. 54 – personal-use property.