Terrorism, not Taxes, Is the Key Focus on Bitcoin, Canada Says

(Bloomberg) -- Canadians trading bitcoin shouldn’t hold their breath waiting for specific rules on how they’ll be taxed.

Finance Minister Bill Morneau, speaking on the sidelines of the World Economic Forum in Davos, said Canada isn’t planning changes to existing tax code to deal with crypto-currencies. But some observers say the rules leave too much room for uncertainty about Bitcoin, which in Canada can essentially be treated as money, a commodity or even income.

“We don’t have any specific Bitcoin or crypto-currency overhaul” in the works, Morneau told Bloomberg’s Francine Lacqua in a Jan. 23 television interview. 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, he said, Bitcoin’s tax treatment “isn’t unique in any way.”

Some global policy makers, however, are calling for swift global action on regulation after Bitcoin’s meteoric 2017 rise -- and subsequent slide this year. The cryptocurrency increased more than 14-fold in 2017, according to Bloomberg pricing, and Morneau’s status-quo approach is one example of the challenges regulators face in responding.

Not Enough

“They think that the current tax regime, tax system, effectively addresses this new technology,” Laura Gheorghiu, a partner at law firm Gowling WLG, said in a telephone interview. “It becomes evident pretty quickly that it’s not enough and people are struggling to figure out how they should be reporting these transactions.”

The U.S. Internal Revenue Service treats Bitcoin as a property, and generally as a capital gain, but taxes it as income for Bitcoin miners or in other cases. U.S. President Donald Trump’s tax bill also effectively closed a gray area by applying taxes when one virtual currency is swapped for another.

In Canada, decades-old tax rules with no specific provisions for digital currencies are being applied to a fast-changing, online technology that presents its own complications. The existing system generally considers Bitcoin a commodity, and profits can be either a capital gain -- half of which is taxed -- or fully taxable income, like a salary. It depends “on the facts and circumstances of the particular taxpayer,” Finance Department spokesman Jack Aubry said in an email.

Treatment Options

How that shakes out remains to be seen. Tax lawyers point to questions such as when Bitcoin income should be recognized, how mining is treated, whether Bitcoin is subject to foreign reporting requirements and whether sales taxes should ever be applied. Nonetheless, general Canadian tax principles are adequate, one tax lawyer said.

“There’s no need for special rules,” said David J. Rotfleisch, a tax lawyer with Toronto-based Rotfleisch & Samulovitch PC. “It would probably be helpful to the general public to come out and say, but the general rules apply.”

For purchases, Canada treats Bitcoin as if someone bartered one good for another, not as a currency. For swaps of Bitcoin to another virtual currency, such as Ether, Aubry said each would generally be considered a taxable event -- which could be tricky given the pace at which some trades are made, and for an investor who can’t pay the tax with Bitcoin itself.

This is “probably the biggest area of misunderstanding,” Rotfleisch said. “If you swap currency to currency, you’ve got to report it.” People who haven’t can voluntarily disclose it, but the rules for a voluntary disclosure, on Bitcoin or anything, become less forgiving on March 1, he said. “You should consider doing it now, rather than then.”

No Answers

Gheorghiu said clients are still uncertain about things such as capital gains on swaps of different currencies and valuation of new “forks,” which leave people with coins on different networks. Canada also has special rules for assets held abroad exceeding C$100,000 ($80,300), triggering a separate reporting requirement that, in the case of virtual currencies, raises a question of where they’re held. “These are all sort of very high level tax policy questions that don’t have answers,” Gheorghiu said.

How well Canada can enforce any rules also remains an open question. Bitcoin transactions are recorded on a public ledger but are tricky to link to an individual taxpayer. “The identities of the parties and the ability to collect a tax may remain elusive,” Sherri Haymond, an executive vice president at MasterCard, told Canadian lawmakers in hearings that led to a 2015 report.

Crypto Levy

Virtual currencies could also undercut government revenue. The existing financial system funds the Bank of Canada through “seigniorage revenue,” a portion of which eventually goes to the federal government. “A lower demand for cash resulting from increased use of digital currencies would reduce the amount of seigniorage revenue available to it and remitted to the government,” and could undercut the Bank’s ability to fulfill its mandate, the report said.

Bitcoin and other “distributed trust technologies” are fundamentally difficult for regulators because they’re not bounded by nations as other economic systems are, said Marc-David Seidel, a professor at the University of British Columbia’s Sauder School of Business. It could be easier for authorities to shave off a percentage of each transaction, like a sales tax, he said.

“The regulation at some level is probably eventually going to have to be some kind of a worldwide regulation,” he said.

--With assistance from Olga Kharif Greg Quinn and Francine Lacqua

To contact the reporter on this story: Josh Wingrove in Ottawa at jwingrove4@bloomberg.net.

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier, Steven Frank

©2018 Bloomberg L.P.