Canada ONLY: Taxes and law

[bobitza]

if you are mining BTC and leave it as BTC it is not taxable because it is unrealized income. It only becomes taxable when you convert it to fiat (or trade it for something).

So let's say year 1 the miner (operating as a business) invests $2,000 CAD into hardware, and by the end of the year has 200 BTC and electric consumption of $600 CAD to generate those BTCs.

Then in year 2 the BTCs are sold (not sure of Canada has the distinction of short-term vs. long-term capital gain, assume all BTCs were held 1 year after mined).

Would electricity be deducted in year 1?   If so those BTCs would need to sit on the books as an asset somewhere then, right?  Heh, ... inventory?

Sorry for reviving an old topic but I found this relevant as I'm contemplating starting a "real" mining company.

I find the mix of BTC and CAD denominated assets confusing when making a balance sheet for the company. Like Stephen said, are the BTC kept as inventory? 

What if you decide to give the BTC away as bond payments or dividends? How will those actions affect the way you state your net income?

[JordanL]

if you are mining BTC and leave it as BTC it is not taxable because it is unrealized income. It only becomes taxable when you convert it to fiat (or trade it for something).

So let's say year 1 the miner (operating as a business) invests $2,000 CAD into hardware, and by the end of the year has 200 BTC and electric consumption of $600 CAD to generate those BTCs.

Then in year 2 the BTCs are sold (not sure of Canada has the distinction of short-term vs. long-term capital gain, assume all BTCs were held 1 year after mined).

Would electricity be deducted in year 1?   If so those BTCs would need to sit on the books as an asset somewhere then, right?  Heh, ... inventory?

Sorry for reviving an old topic but I found this relevant as I'm contemplating starting a "real" mining company.

I find the mix of BTC and CAD denominated assets confusing when making a balance sheet for the company. Like Stephen said, are the BTC kept as inventory? 

What if you decide to give the BTC away as bond payments or dividends? How will those actions affect the way you state your net income?

BTC is the same as having cash on hand, not inventory. It is just another currency, the same as if you were using USD and CAD.

[Brunic]

Good idea to revive this topic, I wanted to add something about mining.

I went to my local CLD (a government agency for business) and asked them about mining. They told me after research that Bitcoin is in a legal gray zone and that mining is not considered a business in their eyes, but mainly a hobby. I told them I was making a 4-digit number per month and they still told me that it was a hobby.

So, for those living in Quebec, Canada, mining is a hobby in the government eyes until something new comes out. Since I'm a freelancer, I'm looking into putting that revenue with my "Travailleur Autonome"(autonomous worker?) status.

From what I can see, there's no perfect way to solve that matter, since government are always fucking late with technology. But my take is that all the CAD money you made selling Bitcoins should be declared in a way or another. It should cover you from being bit in the ass later on. As for declaring the Bitcoin mined but not cashed out, well, if they make the legal framework for that, I'll be glad to do so, but in the meantime, there's no sane way of doing that.

[Epoch]

Keep in mind that any activity that generates income falls under Federal jurisdiction, not just provincial. And, according to the Canada Revenue Agency, all income (with only a few very specific exemptions) must be declared on your Federal (and provincial) Income Tax return.

Even if that activity is 'just a hobby', it is considered as business income in the government's eyes:

http://sbinfocanada.about.com/cs/taxinfo/f/hobbybiz.htm

Basically you must report the money you make from your hobby as business income by completing Form T2125. One grey area, stemming from there being no governmental directive on the status of BTC (whether it is to be treated as a commodity or a currency, or something else), is how to report BTC retained as BTC (rather than converting BTC to fiat).

But if you convert most of your mined BTC into fiat, it is straightforward to report. One benefit from reporting it is that it lets you make certain deductions (depreciation of your mining hardware, and electricity costs being two useful deductions). You would not be able to do this if you did not declare your mining income.

[bobitza]

So, for those living in Quebec, Canada, mining is a hobby in the government eyes until something new comes out. Since I'm a freelancer, I'm looking into putting that revenue with my "Travailleur Autonome"(autonomous worker?) status.

Merci pour l'info.

Now about BTC as cash in hand ... would you basically report the value of your BTC deposits in CAD when doing a Balance statement? I wouldn't agree with that because:

- BTC is not actually cash in hand, you have to find an exchange to trade it in CAD in large amounts without crashing the price.
- there are big price fluctuations, so your BTC reserve can be valued at 10k or 20k; that will impact your profit and loss and it shouldn't.

[Brunic]

I see BTC like hockey cards. If you buy a hockey card package and you get a Mario Lemieux rookie platinum card that is worth 3000$, I don't see how you have to declare that income, since you never had income in the first place, only a hockey card that you bought 2$ that some people value at 3000$.

But, if you sell your Mario Lemieux rookie card for 3000$, now you have income that you have to declare.

So, for those living in Quebec, Canada, mining is a hobby in the government eyes until something new comes out. Since I'm a freelancer, I'm looking into putting that revenue with my "Travailleur Autonome"(autonomous worker?) status.

Merci pour l'info.

Now about BTC as cash in hand ... would you basically report the value of your BTC deposits in CAD when doing a Balance statement? I wouldn't agree with that because:

- BTC is not actually cash in hand, you have to find an exchange to trade it in CAD in large amounts without crashing the price.
- there are big price fluctuations, so your BTC reserve can be valued at 10k or 20k; that will impact your profit and loss and it shouldn't.

I declare what is in CAD. If there was a column where I could declare my BTC I would, but there's nothing for that. And I'm not going to declare the theorical CAD of my BTC, since it's that value only in theory. If, when I mine a BTC, is at 12$ on the market, but when I go to sell it, it's now at 9.50$, I get 9.50$, not 12$.

[jl2035]

There are many ways to avoid taxes...

[ArticMine]

I see BTC like hockey cards. If you buy a hockey card package and you get a Mario Lemieux rookie platinum card that is worth 3000$, I don't see how you have to declare that income, since you never had income in the first place, only a hockey card that you bought 2$ that some people value at 3000$.

But, if you sell your Mario Lemieux rookie card for 3000$, now you have income that you have to declare.

So, for those living in Quebec, Canada, mining is a hobby in the government eyes until something new comes out. Since I'm a freelancer, I'm looking into putting that revenue with my "Travailleur Autonome"(autonomous worker?) status.

Merci pour l'info.

Now about BTC as cash in hand ... would you basically report the value of your BTC deposits in CAD when doing a Balance statement? I wouldn't agree with that because:

- BTC is not actually cash in hand, you have to find an exchange to trade it in CAD in large amounts without crashing the price.
- there are big price fluctuations, so your BTC reserve can be valued at 10k or 20k; that will impact your profit and loss and it shouldn't.

I declare what is in CAD. If there was a column where I could declare my BTC I would, but there's nothing for that. And I'm not going to declare the theorical CAD of my BTC, since it's that value only in theory. If, when I mine a BTC, is at 12$ on the market, but when I go to sell it, it's now at 9.50$, I get 9.50$, not 12$.

Let us keep it simple. Let us say you mine 25 BTC on December 30, 2012 and sell those BTC on January 03, 2013. For the sake of argument let us assume the BTC / CAD rate is the same when you mine the BTC and when you sell the BTC. What year do you declare the income 2012 or 2013?

[bobitza]

I think the revenue should be declared when realized. In your example, in 2013.

[Brunic]

Let us keep it simple. Let us say you mine 25 BTC on December 30, 2012 and sell those BTC on January 03, 2013. For the sake of argument let us assume the BTC / CAD rate is the same when you mine the BTC and when you sell the BTC. What year do you declare the income 2012 or 2013?

I go with bobitza on that. I would use the moment when you sell and go with 2013. When you sell, you tend to maximize your profit, so it's the most logical valuation of your income in that period of time. There's also no guarantee you mined those coins on december 30. Maybe you mined them 3 months ago, when the price was at 10$, but use the December 30 date because the BTC price dropped at 4$ at that moment. If you would declare your income based on the moment you got the coins, people would tend to minimize their income (use the lowest prices). With the selling moment, you tend to maximize your profit, so make more money, pay more taxes and make government happy.

Consider it's my personal advice, and I'm no lawyer, financial advisor or nothing like that.

[ArticMine]

Let us keep it simple. Let us say you mine 25 BTC on December 30, 2012 and sell those BTC on January 03, 2013. For the sake of argument let us assume the BTC / CAD rate is the same when you mine the BTC and when you sell the BTC. What year do you declare the income 2012 or 2013?

I go with bobitza on that. I would use the moment when you sell and go with 2013. When you sell, you tend to maximize your profit, so it's the most logical valuation of your income in that period of time. There's also no guarantee you mined those coins on december 30. Maybe you mined them 3 months ago, when the price was at 10$, but use the December 30 date because the BTC price dropped at 4$ at that moment. If you would declare your income based on the moment you got the coins, people would tend to minimize their income (use the lowest prices). With the selling moment, you tend to maximize your profit, so make more money, pay more taxes and make government happy.

Consider it's my personal advice, and I'm no lawyer, financial advisor or nothing like that.

Yes but what happens if one simply does not sell for years or even decades then one defers the income and payment of the corresponding tax for years or decades and the CRA is not going to be happy at all. The procedure I use is to treat income earned in BTC for tax purposes at the BTC / CAD rate when the income is earned. If the BTC are subsequently sold afterward the difference is a treated as a capital gain or loss.

So for example let us say I earn 25 BTC on December 30th 2012 and the BTC / CAD rate is $12 then the income declared for tax purposes is 300 CAD. I am also deemed to have acquired the 25 BTC for 300 CAD which will affect the adjusted cost base of all my BTC.

Now let us say in 2013 I sell 25 BTC for say 600 CAD.  Let us also say my adjusted cost base for BTC is say 10 CAD per BTC. This would lead to a capital gain of 350 CAD (600-25*10). If on the other hand my BTC adjusted cost base is say 30 CAD per BTC then I would have a capital loss of 150 CAD (600-25*30).

It is the same treatment one would use if one was paid in a foreign currency or in kind as barter. This can get real interesting when one trades on MtGox since one is dealing with both the BTC / USD rate and the USD / CAD rate; however the principle is the same with two steps involved.

I am not a lawyer, accountant or other financial advisor and this should not be construed as legal, accounting or financial advice.

[Brunic]

Yes but what happens if one simply does not sell for years or even decades then one defers the income and payment of the corresponding tax for years or decades and the CRA is not going to be happy at all. The procedure I use is to treat income earned in BTC for tax purposes at the BTC / CAD rate when the income is earned. If the BTC are subsequently sold afterward the difference is a treated as a capital gain or loss.

So for example let us say I earn 25 BTC on December 30th 2012 and the BTC / CAD rate is $12 then the income declared for tax purposes is 300 CAD. I am also deemed to have acquired the 25 BTC for 300 CAD which will affect the adjusted cost base of all my BTC.

Now let us say in 2013 I sell 25 BTC for say 600 CAD.  Let us also say my adjusted cost base for BTC is say 10 CAD per BTC. This would lead to a capital gain of 350 CAD (600-25*10). If on the other hand my BTC adjusted cost base is say 30 CAD per BTC then I would have a capital loss of 150 CAD (600-25*30).

It is the same treatment one would use if one was paid in a foreign currency or in kind as barter. This can get real interesting when one trades on MtGox since one is dealing with both the BTC / USD rate and the USD / CAD rate; however the principle is the same with two steps involved.

I am not a lawyer, accountant or other financial advisor and this should not be construed as legal, accounting or financial advice.

It's another way to calculate it, but my problem is, we're using a BTC / CAD rate that have really small volume and with a huge spread. It's not rare to see spread of 30, 50 cents. Also, if you sell your mining production, you affect the price, and you can change it a lot. If I mine and sell 500 BTC right now, I have thoses prices on Virtex:
Bid = 10.80
Ask = 11.37

If you use the ask price:
11.37 x 500 = 5685$
If you use the bid price:
10.80 x 500 = 5400$

Which one do you use? Also, if I would sell in the real world those 500 BTC, the price drop more. Here's the depth:
10.80   345 (3)   345   3726   
10.75   31 (1)   376   4063   
10.67   9 (1)   385   4156   
10.65   10 (1)   395   426
10.60   359 (2)   754   8064

But also, since the price moves so much, maybe by the moment I mine those BTC, I discover I mined and I check the price, the rate have moved a lot more. If I mine them at 10.80$, but I was busy today and the price dropped to 10.25$ when I looked at it, do I have to use the 10.80$ or the 10.25$ price? We're not talking about a couple of cents of margin error, it's about a couple of hundred dollars of difference.

And no, I'm not interested in using Mt. Gox rate for that, since I'm not going to sell them for USD. As for using their CAD rates, it gets better. Right now, it is at 11.69$. So, for the BTC I'm mining right now, my choice of rate is from 10.80$ at one location to 11.69$ at another location. It's almost a 1$ difference, or a 9.2% difference. Go try to make a 9.2% error on your income tax to see how it goes.

Without rules, tools or advice, it's pretty hard to figure it out on our own.

Yes but what happens if one simply does not sell for years or even decades then one defers the income and payment of the corresponding tax for years or decades and the CRA is not going to be happy at all.

Well, they will still sell them one day. And at that point, the BTC value risk to be higher than is it currently. If the CRA would come and tell us "hey guys, we saw that you're doing Bitcoin and it's great. Here the rules about how to do all the calculation of the income tax", I would be the first in line to apply those rules. But it seems they don't care at the moment, and I can't invent rules myself. I'm not paid to do their job, so I'm using the simplest way to manage all this and use my time to work on more important things.

*EDIT*
Forgot the disclaimer:
I am not a lawyer, accountant or other financial advisor and this should not be construed as legal, accounting or financial advice.

[ArticMine]

Yes but what happens if one simply does not sell for years or even decades then one defers the income and payment of the corresponding tax for years or decades and the CRA is not going to be happy at all. The procedure I use is to treat income earned in BTC for tax purposes at the BTC / CAD rate when the income is earned. If the BTC are subsequently sold afterward the difference is a treated as a capital gain or loss.

So for example let us say I earn 25 BTC on December 30th 2012 and the BTC / CAD rate is $12 then the income declared for tax purposes is 300 CAD. I am also deemed to have acquired the 25 BTC for 300 CAD which will affect the adjusted cost base of all my BTC.

Now let us say in 2013 I sell 25 BTC for say 600 CAD.  Let us also say my adjusted cost base for BTC is say 10 CAD per BTC. This would lead to a capital gain of 350 CAD (600-25*10). If on the other hand my BTC adjusted cost base is say 30 CAD per BTC then I would have a capital loss of 150 CAD (600-25*30).

It is the same treatment one would use if one was paid in a foreign currency or in kind as barter. This can get real interesting when one trades on MtGox since one is dealing with both the BTC / USD rate and the USD / CAD rate; however the principle is the same with two steps involved.

I am not a lawyer, accountant or other financial advisor and this should not be construed as legal, accounting or financial advice.

It's another way to calculate it, but my problem is, we're using a BTC / CAD rate that have really small volume and with a huge spread. It's not rare to see spread of 30, 50 cents. Also, if you sell your mining production, you affect the price, and you can change it a lot. If I mine and sell 500 BTC right now, I have thoses prices on Virtex:
Bid = 10.80
Ask = 11.37

If you use the ask price:
11.37 x 500 = 5685$
If you use the bid price:
10.80 x 500 = 5400$

Which one do you use? Also, if I would sell in the real world those 500 BTC, the price drop more. Here's the depth:
10.80   345 (3)   345   3726   
10.75   31 (1)   376   4063   
10.67   9 (1)   385   4156   
10.65   10 (1)   395   426
10.60   359 (2)   754   8064

But also, since the price moves so much, maybe by the moment I mine those BTC, I discover I mined and I check the price, the rate have moved a lot more. If I mine them at 10.80$, but I was busy today and the price dropped to 10.25$ when I looked at it, do I have to use the 10.80$ or the 10.25$ price? We're not talking about a couple of cents of margin error, it's about a couple of hundred dollars of difference.

And no, I'm not interested in using Mt. Gox rate for that, since I'm not going to sell them for USD. As for using their CAD rates, it gets better. Right now, it is at 11.69$. So, for the BTC I'm mining right now, my choice of rate is from 10.80$ at one location to 11.69$ at another location. It's almost a 1$ difference, or a 9.2% difference. Go try to make a 9.2% error on your income tax to see how it goes.

Without rules, tools or advice, it's pretty hard to figure it out on our own.

Yes but what happens if one simply does not sell for years or even decades then one defers the income and payment of the corresponding tax for years or decades and the CRA is not going to be happy at all.

Well, they will still sell them one day. And at that point, the BTC value risk to be higher than is it currently. If the CRA would come and tell us "hey guys, we saw that you're doing Bitcoin and it's great. Here the rules about how to do all the calculation of the income tax", I would be the first in line to apply those rules. But it seems they don't care at the moment, and I can't invent rules myself. I'm not paid to do their job, so I'm using the simplest way to manage all this and use my time to work on more important things.

*EDIT*
Forgot the disclaimer:
I am not a lawyer, accountant or other financial advisor and this should not be construed as legal, accounting or financial advice.

The problem here is to determine the fair market value for tax purposes for a deemed acquisition or disposition of property, and this is not a problem unique to Bitcoin. In fact Bitcoin is in comparison very simple. Ever had to deal with the tax of an estate and have to determine what the price of a piece of real estate was a year ago or in one case 20 years ago? I had.

The reality is one has to make an estimate that is reasonable and that one can justify. Furthermore it has to be applied consistently. In my real estate example I obtained an appraisal. Would another appraiser be out by 9% especially in the 20 year old case?. Possibly, but the point is I have the documentation and can justify the valuation as being reasonable.

So in the BTC example if liquidity is a concern then using the MtGox BTC / USD rate and multiplying it by the Forex USD / CAD rate is reasonable so is using the Virtex price. I would use the last price at the time of receiving the income as opposed to the bid or ask price and of course be consistent. Are they going to differ by a few percent of course but one must also keep in mind that this is self correcting. If one over estimates the cost of the BTC by say 9% then upon sale that capital gain will be 9% less or the capital loss will be 9% greater.

The bottom line is it is way better to be out by 9% on a deemed acquisition with a reasonable and justifiable valuation than to be out 100% by not declaring the income at all. I would put myself in the position of the income tax auditor here. Which file would I rather audit? The one where I have to argue that a deemed acquisition is off by a few percent and the taxpayer acted in good faith or the one where the taxpayer failed to report a whole lot of income? Let us keep in mind I can only audit one of the two files and I am measured on my performance by how much additional tax revenue and penalty revenue I bring in today, not a few years down the road.  

I would bring your example and calculations to a tax professional. Trust me there is a very high chance they have seen this issue before and on an asset way less liquid than Bitcoin.

I am not a lawyer, accountant or other financial advisor and this should not be construed as legal, accounting or financial advice.

[Brunic]

The problem here is to determine the fair market value for tax purposes for a deemed acquisition or disposition of property, and this is not a problem unique to Bitcoin. In fact Bitcoin is in comparison very simple. Ever had to deal with the tax of an estate and have to determine what the price of a piece of real estate was a year ago or in one case 20 years ago? I had.

The reality is one has to make an estimate that is reasonable and that one can justify. Furthermore it has to be applied consistently. In my real estate example I obtained an appraisal. Would another appraiser be out by 9% especially in the 20 year old case?. Possibly, but the point is I have the documentation and can justify the valuation as being reasonable.

So in the BTC example if liquidity is a concern then using the MtGox BTC / USD rate and multiplying it by the Forex USD / CAD rate is reasonable so is using the Virtex price. I would use the last price at the time of receiving the income as opposed to the bid or ask price and of course be consistent. Are they going to differ by a few percent of course but one must also keep in mind that this is self correcting. If one over estimates the cost of the BTC by say 9% then upon sale that capital gain will be 9% less or the capital loss will be 9% greater.

The bottom line is it is way better to be out by 9% on a deemed acquisition with a reasonable and justifiable valuation than to be out 100% by not declaring the income at all. I would put myself in the position of the income tax auditor here. Which file would I rather audit? The one where I have to argue that a deemed acquisition is off by a few percent and the taxpayer acted in good faith or the one where the taxpayer failed to report a whole lot of income? Let us keep in mind I can only audit one of the two files and I am measured on my performance by how much additional tax revenue and penalty revenue I bring in today, not a few years down the road.  

I would bring your example and calculations to a tax professional. Trust me there is a very high chance they have seen this issue before and on an asset way less liquid than Bitcoin.

I am not a lawyer, accountant or other financial advisor and this should not be construed as legal, accounting or financial advice.

That's an interesting view. I've talked a little to my accountant about that, we're planning to make a meeting soon to discuss this matter more. We'll see what come from this.

Thanks for your time.

[nbtcminer]

Any update on this?

[dunand]

What do you think about declaring capital gain from bitcoin trading as a "Listed personal property"?

LPP is a type of personal-use property. The principal difference between LPP and other personal-use properties is that LPP usually increases in
value over time. LPP consists of any print, etching, drawing, painting, sculpture, or other similar work of art, jewellery, rare folio, rare manuscript, rare book, stamp or coin. In the case of LPP, losses can be applied to reduce gains on the sale of other LPP.

http://www.cra-arc.gc.ca/E/pub/tg/t4037/t4037-12e.pdf (look for the definition at page 7)

[klondike_bar]

reviving this thread for its usefulness and to see what's changed.

I want to start a miner collective (co-op?) and expect that to do it on a larger scale will mean that tax records become a necessity.

any advice on how that would be done? can any costs be deducted (miner costs, electricity, etc) and would it fall under capital gains for [mining income-costs]-[hardware cost]?

additionally, if someone invested 10BTC with me to basically buy and host miners on thier behalf, how would that work? capital gains for them and then I am taxed on any profit I make? what about hardware costs or resale value?

[Prolifik]

I refuse to pay taxes on my Bitcoin. Government can't do anything about it.
I also refuse to use & carry ID. Shaw internet is awesome in Canada I can sign up for internet service with the name Jimmy Bobbins If I want too.

[work2heat]

Can we get some info on the regulatory environment for bitcoin ATMs in Canada?  If it's just CAD in, BTC out, and if bitcoin is still not considered 'real money' (and hence not under FINTRAC), is it just like selling any other good for dollars?

[arfeniel]

This is old news now but : http://news.gc.ca/web/article-en.do?nid=787789

Also, for those living in Québec, Canada : http://www.lautorite.qc.ca/en/press-releases-2014-autre.html_2014_alert-bitcoin.html