Will Bitcoin Taxation Turn Into an Accounting Nightmare for Canadian Users?
Canada’s approach to Bitcoin taxation will not turn into an accounting nightmare for its users, at least for now, as the government “has no plans” to change tack on how the digital asset class is treated under current tax laws.
Finance Minister Bill Morneau told Bloomberg on the sidelines of the World Economic Forum in Davos that his country isn’t planning changes to existing tax code to deal with the digital coins.
He added: “We don’t have any specific Bitcoin or crypto-currency overhaul in the works. The main focus on Bitcoin is making sure that we understand what’s going on underneath that market, to make sure that we aren’t introducing any risks into our economy, whether they be risks like money laundering or terrorist financing. As an investment, Bitcoin taxation isn’t unique in any way.”
When examining Canada’s approach to the taxation of such currencies, however, the most basic question is whether they are treated as currency or property or even income. Indeed, the nation’s decades-old tax rules leave too much room for uncertainty, and already open the door for some detailed and voluminous accounting.
Several issues to consider
Morneau’s speech contrast with those of the Canadian Securities Administrators (CSA), comprised of the country’s thirteen key financial market regulators across their respective provinces, which has recently publicized plans to regulate digital token sales. Additionally, Canada’s central bank chief Stephen Poloz said on the fingers of the same event that Bitcoin is a gamble, and that he looks to coordinate efforts with global regulators to form policies and develop rules around the digital coins.
The CSA stated that this new fundraising phenomenon should be categorised as securities, at least in some cases. This implies that certain ICOs/ITOs would now need to follow Canadian securities laws, which requires assessing the economic realities of the offering to protect participating investors.
That said, besides the actual computation of tax, there are other compliance issues that the Canadian legislator will have to consider.
Should the lawmakers decide to treat the cryptocurrency as property, the burning question will be how a taxpayer will maintain adequate records to determine the correct amount of tax. What is more of a wild card, though, the taxable amount will be the spread between the buy and sell prices, assuming the coin is appreciated in value since purchase. And even if the account for basis was determined correctly, then we have to examine the other side of the transaction, the value of purchases made with virtual currencies.
As an example, if a cryptocurrency investor bought one bitcoin at $6,000 in September 2017 and then decided to sell the coins at $16,000 in December 2017, that means he realizes $10,000 worth of taxable gains.
IRS approach to Bitcoin taxation
Digital coins such as bitcoin have attracted attention of global regulators from different angles. There are now substantive efforts to regulate the new-aged asset and provide guidance on, among other things, the securities law, anti-money laundering, accounting and tax treatment of cryptocurrencies.
This focus has resulted in the U.S. releasing guidance on the reporting and taxation requirement for the sale, purchase, and trade of cryptocurrency.
The IRS treats new virtual currencies as property for federal income tax purposes, but the authority taxes operations of mining as an income. Although some grey areas still remain, a recent tax overhaul effectively closed that area by applying taxes when one cryptocurrency is swapped for another.