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Taxing cryptocurrencies: GST/HST proposals raise concerns
CPA | Bruce Ball | Oct 29 2019
With the rise of cryptocurrencies, uncertainty is growing over their tax treatment. Learn about existing Canada Revenue Agency (CRA) guidance, as well as CPA Canada’s concerns with newly proposed GST/HST legislation.
As cryptocurrencies enter the mainstream, their users and tax advisers need to understand the tax implications.
Until recently, there has been little legislation on the taxation of cryptocurrencies. The Senate looked into cryptocurrency in 2014 and concluded that Canadians needed more guidance to meet their tax obligations.
See:
Guide to Canadian cryptocurrency taxation
Proposed Amendments to the GST/HST Treatment of Cryptocurrencies
The CRA followed up with useful guidance, reiterating its 2013 ruling that transactions involving virtual currencies are subject to tax as a commodity, rather than a currency. When cryptocurrencies are used to buy goods or services, the CRA views this as a barter transaction for income tax purposes. Therefore, when accepting cryptocurrency as payment for goods or services in the normal course of business, the seller pays income tax on the value of the goods or services at the price it would have charged a third party – which is generally the market value of the cryptocurrency received.
In other words, when you use cryptocurrencies to acquire goods and services, the tax cost of the goods or services received equals the market value of the cryptocurrency exchanged.
Similarly, for GST/HST, the CRA says that when a taxable supply of a good or service is made in exchange for cryptocurrency, the amount paid for the supply equals the fair market value of the cryptocurrency at the time.
A key question has been whether the CRA considers a supply of cryptocurrency to be a taxable supply for GST/HST purposes — that is, should you treat cryptocurrency as money or a financial instrument? If it’s neither, the supply could be taxable, requiring users to charge GST/HST each time they use cryptocurrency for a transaction. Double taxation result — with tax applied once when the cryptocurrency is issued and a second time when it’s used to purchase goods or services.
See: New Regulatory Framework for Canadian Retail Payments Coming in 2019
For example, suppose you are an individual based in Ontario and you are not registered for GST/HST. You buy 100 units of cryptocurrency for $100 and pay $13.00 CAD in HST. If you then buy a good online for 88.50 units (assume the value per unit is unchanged), you’d pay an additional 11.50 units in HST. You’d therefore pay an additional $13.00 CAD in unrecoverable HST compared to what you’d paid for the goods using cash.
As a further problem, some cryptocurrency exchanges keep their users’ identities private. This anonymity makes it difficult to apply the place of supply rules and know what GST/HST rate to charge.
To address these concerns, Finance Canada recently consulted on draft legislation that would exempt cryptocurrency transactions from GST/HST. This would be done by including eligible cryptocurrencies in the definition of financial instrument. To qualify, cryptocurrencies would need to meet the GST/HST law’s definition of a virtual payment instrument (VPI).
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