One of the hottest investment topics right now is cryptocurrency. When I got together with family and friends over the holiday season, the conversation inevitably shifted to cryptocurrency, specifically Bitcoin, as it is undoubtedly the most popular. As is usually the case at these functions, everyone wanted the accountant’s advice on their investment, so here it is.
Bitcoin is a web-based currency with no intermediary (i.e. banks) facilitating the transactions. They are created or “mined” by people using computers to solve complex math puzzles to settle Bitcoin transactions, rewarding their efforts with Bitcoins. The currency can then be stored in a “digital wallet” and allows users to engage in the same activities they would with normal, fiat currency, such as ordering a pizza or transferring money to a friend. Only the user’s wallet ID is displayed in Bitcoin transactions, making the transactions somewhat anonymous and harder to trace back to a specific person. While Bitcoin is a currency designed to be transacted, much of the hype surrounding it is due to its volatility in value over the past year. Whether Bitcoin ends up being a store of value or a medium of exchange will likely depend on the adoption by central governments around the world.
Accounting for Bitcoin
If you purchase Bitcoin as a personal or a corporate investment, you will have to report the income associated with it. Bitcoin is treated as an investment, though it does not meet the definition of a Canadian security, and due to the volatile nature of the investment, there will almost certainly be gains or losses triggered at the time of disposal. It is important to note that gains will be triggered at the point of sale, so if you buy and hold Bitcoins and they increase in value, you are deferring tax until you sell them. In general, when a taxpayer purchases Bitcoin for trading purposes, similar to “day traders” (they engage in the business of trading or investing in cryptocurrency), any gains or losses should be included as income on their tax return. When an individual purchases cryptocurrency for the purposes of holding the asset long-term, the amount of the gain or loss on disposal is considered to be capital. Only 50% of the gains earned from the sale are taxable and included on line 127 of their personal tax return to be taxed at your marginal tax rate. There are more complex considerations surrounding how corporations would report the gains/losses on their tax return so it is best to talk to an accountant to ensure you’re properly reporting income.
Thinking of Accepting Bitcoin?
With all of the hype that Bitcoin generates, it’s easy to lose track of the fact that it’s designed for making and accepting payments – something that most businesses do on a daily basis. If you think your business might want to start accepting Bitcoin, there are a couple factors you may want to consider first.
Bitcoin is extremely volatile, with the currency’s value often fluctuating in excess of 10% weekly. Comparatively, the fluctuations of the Canadian dollar are much lower. The volatility should be a primary consideration when accepting it as a form of payment. If a customer pays a $100 invoice with Bitcoin, the cash amount received one week later could be significantly more or less, depending on the currency fluctuations. At the point of conversion back to Canadian dollars, the change in value would result in a capital gain/loss. This opens your business up to increased exchange risk. From an accounting perspective, the Canada Revenue Agency (CRA) has made it clear that businesses transacting in cryptocurrency must report the Canadian dollar equivalent at the time of the transaction using market exchange rates. This applies to both a company’s revenues and expenses, and gains and losses may be assessed at a future date based on the amount of the currency held. There are also fees associated with transacting in Bitcoin. While the fees were quite minimal a few years ago (as low as six cents per transaction), the fees have ballooned to close to $55 per transaction as of peak trading time in December. Think of this like Uber’s Surge Pricing where the cost per ride increases based on how many people are using the service. It is important to talk to an accountant to properly assess this risks and rewards that cryptocurrency poses to your business.
Things to keep in mind…
Cryptocurrency is a new and rapidly growing financial asset. Due to the rapid fluctuations in the currency’s value, many people are electing to invest in it rather than actually using it to complete transactions. As people begin using cryptocurrency, like Bitcoin, for everyday purchases, its value would be expected to stabilize.
Due to cryptocurrency being a de-centralized medium of exchange/store in value, it is up to the taxpayer to report the taxable income accordingly. Not reporting income will likely result in tighter regulations and potential interventions governments. If you are ever unsure about how to report your cryptocurrency transactions or investments, it is always best to err on the side of caution and contact an experienced accountant. Amplify LLP has a full team of accountants and tax specialists designed to give you the best possible advice regarding cryptocurrency transactions and any other accounting issues you might be facing.