As tax time approaches, purchasers, sellers, traders and holders of digital currencies are wondering whether taxes are payable on digital currencies in Canada. The answer is that it depends.
While the Income Tax Act governs in respect of taxes payable in the digital currency space, the issue of taxes payable on digital currencies in Canada is anything but clear because different government agencies are not on the same page on the legal nature of digital currencies.
Bank of Canada
First of all, the Bank of Canada has apparently said since 2013, that digital currencies are not money, currencies, assets or a securities and earlier this year, that digital currency trading is gambling.
And that’s what may cause confusion because in Canada, gambling winnings are not taxable. The exception is if the gambling activities are professional or are undertaken as a business. Professional gamblers, for example, must pay taxes on their winnings whereas winnings from occasional gambling activities are not taxable.
In Canada, people trade in digital currencies and can gamble legally online in identical ways. With respect to gambling, people register and fund their accounts on sites such as playnow.com run by a provincial government agency. With respect to digital currencies, people also register and fund their accounts on sites that host digital currency exchanges. Considering the similarities of the two activities, one can see how the Bank of Canada would come to the conclusion that trading in digital currencies is gambling given also that they could fall into the same Criminal Code analysis of games of pure skill or chance.
That means that if digital currency trading is gambling, its “winnings” or gains, are not taxable to the extent that the trading is not commercial.
CRA
Despite what the Bank of Canada has said about digital currency trading being gambling, another Canadian government agency, the Canada Revenue Agency, has not characterized digital currency trading as gambling and likely never will. That’s because CRA stated in 2013 that digital currencies are a commodity and the trading thereof may result in taxable income or capital. But you would need a tax event, meaning that when it is sold or traded for something else (e.g., for another digital currency, for services or for cash), taxes if any, are triggered at that time. If a person is just sitting on digital currencies he or she bought then there is neither a gain nor a loss.
So taxes are payable on digital currencies under the Income Tax Act unless it is determined that digital currency trading is gambling and only a Court or the CRA can make such a determination.
Separate and apart from income from trading, if a person uses digital currencies to pay for goods or services, the financial transaction is a barter and taxes are payable on the barter exchange. Taxes are also clearly payable if a person earns digital currencies from mining activities because this is purely commercial.