Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Various issues.
Position: See below.
Reasons: See below.
March 28, 2014
We are writing in response to your email of January 29, 2014, requesting our views regarding the income tax treatment of various transactions involving virtual currencies such as bitcoin.
This technical interpretation provides general comments about the provisions of the Income Tax Act ("Act") and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, "Advance Income Tax Rulings".
As you might appreciate, the determination of the income tax consequences pertaining to any transaction or activity can only be made following a complete review of all the relevant facts and circumstances of the particular situation and, as such, we are only able to provide general comments as they might apply to taxpayers engaging in activities related to the creation of, or trading of, virtual currencies such as bitcoin.
A number of court cases have considered how an activity undertaken for profit is distinguished from a personal endeavour for income tax purposes. A personal endeavour is assumed to provide a personal benefit rather than a financial one; in other words, a personal endeavour is an activity primarily undertaken for pleasure, entertainment, or enjoyment rather than for profit, business, or commercial reasons. In Stewart v. The Queen, 2002 SCC 46, the Supreme Court of Canada stated that "in order for an activity to be classified as commercial in nature, the taxpayer must have the subjective intention to profit and there must be evidence of businesslike behaviour which supports that intention."
Consequently, if it is clear that a personal endeavour or hobby is pursued in a sufficiently commercial and businesslike way, it can be considered to be a business activity, which is a source of income under the Act. Whether a particular activity is undertaken for profit is a question of fact that can only be determined on a case-by-case basis. However, based on the facts provided by you, we agree that you are operating a bitcoin mining business.
Where a taxpayer mines bitcoin in a commercial manner, in computing the taxpayer's income from the business for a taxation year, the value of property described in the inventory at the end of the year must be determined. Section 10 of the Act and Part XVIII of the Income Tax Regulations set out the rules pertaining to the valuation of a taxpayer's inventory for this purpose.
In most cases, either of the following two methods of valuing inventory is available:
Valuation of each item in the inventory at the cost at which it was acquired or its fair market value at the end of the year, whichever is lower.
Valuation of the entire inventory at its fair market value at the end of the year.
Other methods of valuing inventory may be available or required depending on the type of business. For example, property described in the inventory of a business that is an adventure or concern in the nature of trade must be valued at the cost at which the taxpayer acquired the property.
Interpretation Bulletin IT-473R, "Inventory Valuation" also discusses the rules pertaining to the valuation of inventory for the purposes of computing a taxpayer's income from a business. It discusses the available methods of valuing inventory, changes in the method of valuing inventory, the meaning of "cost", the methods of determining cost, and the meaning of "fair market value".
Whether a virtual currency such as bitcoin is held as inventory or as a capital property is also a question of fact. However, where such property is lost or stolen, the comments in Interpretation Bulletin IT-185R (Consolidated), "Losses from Theft, Defalcation, or Embezzlement" may be of assistance. This bulletin provides that a loss of trading assets, such as inventory or cash, through theft, defalcation, or embezzlement, is normally deductible in computing income from a business if such losses are an inherent risk of carrying on the business and the loss is reasonably incidental to the normal income-earning activities of the business. The amount of the taxpayer's loss would normally be determined by reference to the cost of the inventory to the taxpayer for income tax purposes less the amount of any compensation received (such as insurance), if any. Where the property is capital property, the comments in paragraph 9 of IT-185R should be taken into account. You also enquired about situations where virtual currencies are acquired as gifts. Interpretation Bulletin IT-334R2, "Miscellaneous Receipts" provides that an amount received as a gift (a gift is a voluntary transfer of real or personal property without any consideration or expectation), is not subject to income tax in the hands of the recipient. However, where an individual receives a "voluntary payment" or other valuable transfer or benefit from the individual's employer, or from some other person in connection with that employment, the amount of the payment or the value of the transfer or benefit must generally be included in the individual's income pursuant to subsection 5(1) or paragraph 6(1)(a) of the Act. Similarly, "voluntary payments" or other transfers or benefits received by a taxpayer in respect of, or in connection with, a business carried on by the taxpayer, must be included in the taxpayer's income from that business. As with any business income, taxpayers must report all taxable amounts received in a year on that year's income tax and benefit return. There is no de minimus rule with respect to the amounts required to be included in income. The employer or payer of such an amount would generally be able to deduct the amount in computing its income.
You asked us to confirm whether barter transaction rules apply when one type of virtual currency is exchanged for another type of virtual currency. Interpretation Bulletin IT-490, "Barter Transactions" provides that in the case of goods bartered by a taxpayer for other goods or services, the value of those goods must be brought into the taxpayer's income if they are business-related. As such, an exchange of one type of virtual currency for another in such circumstances would trigger a disposition for income tax purposes.
More information on digital currency is available by consulting or our fact sheet, "What you should know about digital currency".
We trust that these comments will be of assistance.
Michael Cooke, C.P.A., C.A.
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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