Is Bitcoin Taxable?

The short answer is “you bet!”  There are tax implications when you sell it or use it to buy something.

CRA considers buying and selling bitcoin to be similar to buying and selling any other commodity.  If you make trades daily and spend hours tracking it’s value and opportunities, your gains may be considered income.  If you trade infrequently, it’s likely to be treated as capital gains.

In either case, you are expected to keep track of your activity and report it on your tax return.  FYI, if you don’t, it’s a crime.

Aside from trading, what happens if you pay for things with bitcoin?  It’s a bit more complicated, but let’s look at a basic example.  Suppose you bought a really cool mountain bike from a friend using bitcoin.  You paid the equivalent of $600, which (as of this writing with bitcoin at $13,771) would be 0.04357 bitcoin.  If you bought that amount of bitcoin last October 1, you would have paid about $191.  The difference of $409 (600-191) is a capital gain to you when you converted it to something else (the bike), and must be reported on your 2018 tax return.

It gets even more complicated when you do it often, say buying a meal in a restaurant, or many small transactions.  To add even more work to the mix, the amount you paid for any bitcoin you spend is a blended amount of the volume of bitcoin you bought and the amount of money you paid for it.

Suppose you bought 1 bitcoin in on October 1, 2018, for $4,394 and another on November 1, 2018 for $6,750.  Your average cost for your bitcoins would be $5,572.  And so your capital gain on the transaction above would be (13771-5572) x 0.04357, or $357.

Ok, suppose you trade bitcoin weekly, or daily?  Your average cost of bitcoin to be used to determine your capital gain when you sell it would be very arduous to calculate.  There are solutions, however, like bitcoin.tax which is an app that does the heavy lifting for you.

Meanwhile, I’m guessing there are many people out there trading or spending bitcoin who don’t know the tax implications of it.

It remains to be seen how CRA will address this practically – there are a ton of taxable transactions out there (read: tax to be collected) and the IRS (US) is already cracking down on it using Chainalysis software.  On the CRA website they state:  “(CRA) is very active in pursuing cases of non-compliance, in order to ensure that the tax system remains fair for everyone.​”