Gabriel Scheare uses the world's first bitcoin ATM on October 29, 2013 at Waves Coffee House in Vancouver, British Columbia.

The world’s first Bitcoin ATM, named Robocoin, was introduced in 2013 at Waves Coffee House in Vancouver, B.C. Millennials are becoming increasingly more comfortable using cryptocurrencies such as Bitcoin. (David Ryder/Getty Images)

Canada | Economy

Bitcoin: if you don’t know, then don’t invest, say experts

Assorted cryptocurrencies have captured the attention of Canadians—even though the technology and principles behind them aren’t always understood

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Bitcoin and assorted cryptocurrencies have captured the attention of Canadians—even though the technology and principles behind them aren’t always understood.

“If people interested in Bitcoin ask me what it is, my standard response is that if they have to ask about it, they shouldn’t invest in it,” says Marc-David Seidel, a professor at the University of British Columbia Sauder School of Business. “I consider it highly speculative.”

Bitcoin is a cryptocurrency based on blockchain, a software platform designed to create a secure, decentralized and transparent record of all transactions completed within it. Blockchain, however, is just one of a number of competing distributed trust technologies, which include Tangle and Merkle tree.

“Distributed trust technologies promise that centralized institutions will no longer be required for people to trust each other,” Seidel says. “The underlying concept of distributed trust is definitely going to be long-term, but perhaps Bitcoin and blockchain won’t be the ones that last.”

Even classifying Bitcoin, Ethereum and Ripple as currencies is a bit of a stretch, says Seidel. By his definition, a currency needs to be widely used to conduct transactions.

“Currently, we see only a little use of these as currencies,” he says.

But cryptocurrencies are gaining acceptance. Mogo Finance Technology Inc., for example, recently added cryptocurrency trading to its mobile banking platform.

“Millennials in particular are jumping on the cryptocurrency train and it continues to gain momentum,” says Chantel Chapman, Mogo’s financial literacy educator. “Many have been inspired by media reports of big cryptocurrency wins. And cryptos are so new that even the experts don’t fully know the ins and outs yet. It can be intimidating to invest, but they don’t feel so alone on the journey to understanding them, because it’s new to everyone. That makes it more approachable.”

MP Group, a Toronto chartered accounting firm, was among the first to enter the Canadian blockchain space in 2015, working for such clients as the co-founder of Ethereum. The firm has since helped clients across the country answer questions about buying, investing in and selling cryptocurrencies.

“A few clients ask whether cryptocurrency can trigger tax consequences,” says partner and CPA Kunal Parshotam. “Yes it can, and you have to plan carefully to minimize tax consequences.”

The Canada Revenue Agency treats cryptocurrencies as commodities, and tax consequences largely depend on the nature of the activity in which investors engage.

“If you’re an investor with a long-term view, an increase in the value of that cryptocurrency could represent a capital gain,” notes partner Raffael Mazze, who is also a CPA. “If you’re actively trading cryptocurrencies seeking business profits, it’s considered business income and would be taxed at a higher rate.”

For example, if an early Bitcoin investor uses an increase in value to purchase units of another alternative currency, such as Ripple, the value of that purchase would be seen as a capital gain.

“It’s treated by the CRA as a barter transaction, and many investors don’t realize that,” says Parshotam. “They may need a little guidance about operating in the cryptocurrency space.”

And yes, MP Group accepts bitcoin as payment.

“But to date, CRA doesn’t,” says Mazze. “They’ll accept cash, but nothing they see as a commodity.”

FOR MORE

Learn more about cryptocurrencies and the primary issues involved in accounting for them under International Financial Reporting Standards in CPA Canada’s An introduction to accounting for cryptocurrencies. CPA Canada is also hosting a webinar, Accounting for Cryptocurrencies under IFRS, on August 14.