Digital currency is electronic money. It’s not available as bills or coins.
Cryptocurrencies are a type of digital currency created using computer algorithms. The most popular cryptocurrency is Bitcoin.
No single organization, such as a central bank, creates digital currencies. Digital currencies are based on a decentralized, peer-to-peer (P2P) network. The “peers” in this network are the people that take part in digital currency transactions, and their computers make up the network.
Digital currencies are not a legal tender
Digital currencies, such as Bitcoin or other cryptocurrencies, are not legal tender in Canada. Only the Canadian dollar is considered official currency in Canada.
The Currency Act defines legal tender. Legal tender is defined as:
- bank notes issued by the Bank of Canada under the Bank of Canada Act
- coins issued under the Royal Canadian Mint Act
Digital currencies are not supported by any government or central authority, such as the Bank of Canada.
Financial institutions, such as banks or credit unions, don’t manage or oversee digital currency.
How tax rules apply to digital currency
Tax rules apply to digital currency transactions, including those made with cryptocurrencies. Using digital currency does not exempt consumers from Canadian tax obligations.
This means digital currencies are subject to the Income Tax Act.
Buying goods or services using digital currency
Goods purchased using digital currency must be included in the seller’s income for tax purposes. GST/HST also applies on the fair market value of any goods or services you buy using digital currency.
Buying and selling digital currency like a commodity
When you file your taxes you must report any gains or losses from selling or buying digital currencies.
Digital currencies are considered a commodity and are subject to the barter rules of the Income Tax Act. Not reporting income from such transactions is illegal.