What is virtual currency?
Virtual currency is digital asset that can be used to buy and sell goods or services. Cryptocurrency is a blockchain-based, virtual currency. Bitcoins are an example of a cryptocurrency. However, there are thousands of other types. Cryptocurrencies are not controlled by central banks or any country, and they can be traded in a relatively anonymous way.
Many cryptocurrencies can be:
- bought with traditional currency (known as fiat currency / legal tender) and sold for fiat currency / legal tender
- transferred from one person to another
- exchanged for other cryptocurrencies or used to pay for goods or services directly
All of these types of transactions or exchanges may have tax implications.
For more information on virtual currency see our Guide for cryptocurrency users and tax professionals.
What tax rules apply when virtual currency is used to buy goods or services?
Income tax purposes
This information is for individuals preparing income tax and benefit returns and corporations preparing income tax returns, who have sold a good or service and were paid in cryptocurrency. There are different rules for calculating GST/HST on a taxable transaction.
When cryptocurrency is used to pay for goods or services, the rules for barter transactions apply for income tax purposes.
A barter transaction occurs when any two persons agree to exchange goods or services and carry out that exchange without using legal tender. For example, paying for movies with virtual currency is a barter transaction. The Canadian-dollar value of the movies bought using cryptocurrency must be included in the seller’s income for tax purposes.
For more information on the tax implications of barter transactions, see Interpretation Bulletin IT-490, Barter Transactions.
Goods and services tax / harmonized sales tax (GST/HST) purposes
This information is for GST/HST registrants reporting revenue and GST/HST on their GST34 return. There are different rules for calculating income reported on your income tax and benefit return or corporation income tax return.
Cryptocurrency may be accepted as payment for a taxable good or service by a GST/HST registrant. In such a case, the GST/HST rules require that the fair market value of the consideration that was received for the good or service be determined and GST/HST calculated based on that value.
For example, a GST/HST registrant who accepts cryptocurrency for a movie ticket at their theatre would have to determine what the fair market value of the cryptocurrency is at the time of the transaction. The value of the movie ticket bought using cryptocurrency must be included in the registrant’s GST/HST return as revenue with the applicable amount of GST/HST. The amount of revenue and the related GST/HST would be reported in Canadian dollars.
For more information on the tax implications of when a consideration other than money is received for payment, see the Excise Tax Act, section 153(1)(b).
What tax rules apply when virtual currency is used like a commodity?
Virtual currency can also be bought or sold like a commodity. Any resulting gains or losses could be taxable income or capital for the taxpayer. To determine if a transaction is on account of income or capital, see paragraphs 9 to 32 of Interpretation Bulletin IT-479R, Transactions in Securities.
Also, there may be tax consequences if you choose to gift, trade, or use cryptocurrency to buy goods or services or convert cryptocurrency to a government-issued currency.
What tax rules apply when virtual currency is used to pay an employee?
If an employee receives digital currency as payment for salary or wages, the amount (in Canadian dollars) will be included in the employee’s income according to subsection 5(1) of the Income Tax Act.
What tax rules apply when virtual currency is earned from mining or staking?
Mining involves using computers to solve mathematical problems that confirm cryptocurrency transactions. Miners will place cryptocurrency transactions in blocks and try to guess the number that will create a valid block. A valid block is accepted by the corresponding cryptocurrency’s network and becomes part of a public ledger, known as a blockchain. When a miner successfully creates a valid block, they will receive two amounts in one payment. One amount will represent the creation of a new cryptocurrency on the network and the other amount will represent the fees from transactions included in the newly validated block. Those who do the mining are paid in the cryptocurrency that they are validating.
Staking (proof of stake) is a different process to earn cryptocurrency payments but may still result in earnings that have tax implications. Proof of stake is an alternative distributed consensus mechanism where a person is selected out of a group of participants (forgers) to validate a block of transactions. Much like mining, when the selected person successfully creates a valid block, they will receive two amounts in one payment. One amount will represent the creation of a new cryptocurrency on the network and the other amount will represent the fees from transactions included in the newly validated block.
For more information on the tax implications of mining and staking, see our cryptocurrency guide.
Should you be concerned about reporting requirements when using virtual currency?
Not reporting income from domestic or foreign sources is illegal. Canadians should know that the Canada Revenue Agency is very active in pursuing cases of non-compliance, in order to make sure that the tax system is fair for everyone.
If required, you can correct your tax affairs through our Voluntary Disclosures Program.
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