Bitcoin from a GST/HST Perspective
Recently, you may be hearing the term ‘Bitcoin’ on the news. According to their website, bitcoin.org, Bitcoin is a consensus network that enables a new payment system and a completely digital money. It is the first decentralized peer-to-peer payment network that is powered by its users with no central authority or middlemen. From a user perspective, Bitcoin is pretty much like cash for the Internet. According to the CRA, Bitcoins are an example of digital currency. Digital currency is virtual money that can be used to buy and sell goods or services on the Internet. Bitcoins are not controlled by central banks or any country, and can be traded anonymously. Bitcoins can be bought and sold in return for traditional currency, and can also be transferred from one person to another.
As a result, CRA states that the tax rules will apply when digital currency is used. This was confirmed in a recent technical ruling 2013-0514701I7 issued by the CRA in late 2013. Where digital currency is used to pay for goods or services, the rules for barter transactions will apply. A barter transaction occurs when any two persons agree to exchange goods or services and carry out that exchange without using legal currency. The CRA does not consider Bitcoins to be legal currency. In those transactions where a taxable supply of a good or service is made and the consideration for that supply is Bitcoin, the consideration for the supply is deemed to be equal to the fair market value of the Bitcoins at the time the supply is made for the purposes of determining the GST/HST payable for the supply. See Interpretation Bulletin IT-490 “Barter Transactions” for more details.
For example, if a GST/HST registrant sells a good for 50 Bitcoins and the sale is subject to GST/HST, the registrant will be required to collect the GST/HST calculated on the fair market value of the 50 Bitcoins at the time of the sale. The registrant will be required to include in its net tax remittance the GST/HST collectible. The recipient, if a GST/HST registrant, would be eligible to claim an input tax credit for the GST/HST to the extent the good is for consumption, use or supply in the recipient’s commercial activities.
As the use of digital currency increases in popularity, it will be interesting to monitor how the rules will adapt in Canada and Globally. For example, in Singapore, their Inland Revenue Authority (IRAS) has issued a statement that Bitcoin will not be considered a ‘currency’ or a form of money under their GST Act. Sweden recently announced that it views Bitcoin as an asset; while it’s Nordic neighbor, Finland, deems it to be a commodity. How will other countries side on this issue is still a work in progress. If you operate in various countries and accept Bitcoin for payment, you will need to be aware of each country’s stance on this issue. Will there be a unified consensus on digital currencies at some point in the future? Don’t bank on it!