Virtual currency (such as cryptocurrency) can be used as a method of payment if both parties agree, or it can simply be saved. It can be traded on an exchange or peer-to-peer without going through a traditional financial system. It is a digital representation of value that is not legal tender in Canada. It does not physically exist.
It is important not to confuse virtual currency (for example, cryptocurrency such as Bitcoin or Ethereum) and electronic cash (such as the dollar). Whereas electronic cash is stored electronically and accessed using a cell phone, chip card or debit card, cryptocurrency is issued and transacted using blockchain technology, and generally requires mining.
There is a significant degree of risk involved in using cryptocurrency—its value is highly volatile, and the risk of fraud is high. For more information, see Crypto on the Autorité des marchés financiers website.
Since virtual currency is not legal tender in Canada, we consider it to be property, not currency. For income tax purposes, transactions involving virtual currency are considered barter transactions (where two parties agree to trade property without using money).
As a result, there are tax consequences if you:
- use virtual currency to acquire goods or services;
- convert it to monetary currency;
- exchange it for another virtual currency;
- sell it; or
- use it to make a donation.
If you make transactions using virtual currency, see Reporting Virtual Currency Income.
The GST/HST and QST on the supply of taxable goods and services are calculated on the value in Canadian dollars of the virtual currency given as consideration for the supply. As a result, if your business accepts cryptocurrency as payment for taxable goods or services, you must collect and remit GST/HST and QST in accordance with the regular rules.
However, since cryptocurrency is a financial instrument, its supply is generally considered an exempt supply on which you are not required to collect and remit GST/HST and QST.
If you trade, buy or sell virtual currency or engage in mining activities, you must keep records and documents supporting the information in them for six years following the last year they cover. The same requirement applies to businesses that accept virtual currency as payment for goods and services.
You must keep all the following about your virtual currency transactions:
- transaction dates;
- receipts for the purchase or transfer of virtual currency;
- the value of the virtual currency in Canadian dollars at the time of each transaction;
- the digital wallet records and cryptocurrency addresses;
- a description of the transaction and the other party (even if it is just their cryptocurrency address);
- the exchange records;
- accounting and legal fees;
- software costs related to managing your tax affairs.
If you are a miner, you must also keep the following:
- receipts for the purchase of cryptocurrency mining software;
- receipts to support your expenses and other records associated with the mining operation (such as power costs, memory pool fees, software specifications, maintenance costs, and hardware operation time);
- memory pool records.
For more information, click Keeping Registers, Books of Account and Supporting Documents.