The short answer? No.
Most people believe crypto transactions are private and untraceable – the digital equivalent of passing cash “under the table.” However, the details of every crypto transaction are logged on the public blockchain for anyone to read. While transactions are made under pseudonymous addresses, not personal identities, these pseudonyms can be reverse engineered to identify real-world users. The reality is that crypto transactions are far less private than you might think, but without keys to unlock the code, crypto can be hidden on private wallets or on crypto platforms.
How does someone making a transaction with crypto know they’ll get the real thing, or anything at all? Because crypto is decentralized, there are few, if any, regulations to prevent counterfeiting and fraud; even if they did exist, there is no entity to enforce them. Unlike cash, which requires significant knowledge and specialized equipment to convincingly counterfeit, counterfeiting crypto is relatively easy. All a counterfeiter has to do is create a token with the same, or a very similar, name as an established cryptocurrency. Crypto transactions can also be fully automated, through smart contracts, whereas cash transactions (even auto-withdrawals) require human approval at least once. Automated smart contract transactions enable scams where a user sends crypto to a specified address on the promise they will receive a different type of crypto; but the user is often sent counterfeit tokens, if they receive anything at all.
Even if a transaction is legitimate and both parties receive authentic crypto, there is no guarantee that the token’s value will remain the same. Unlike cash, which is relatively stable in Canada (because its value is backed by governments and its supply is controlled by banks), crypto can be extremely volatile. The volatility of crypto increases the potential for significant gain, but it also creates a severe risk of devastating financial loss. Tokens with a finite supply, like Bitcoin, are especially vulnerable to devaluation over time; if the market loses interest, there is no entity to uphold a token’s value to prevent total devaluation. Someone with thousands of dollars in crypto could potentially find themself near-penniless overnight.
Finally, crypto is treated differently from cash by the Canada Revenue Agency (“CRA”): crypto is considered a commodity and taxed like a barter transaction. So, if you accept Bitcoin for an invoice of $10,500.00 in your company, and services were worth $10,000, you have to remember that GST applies to barter transactions, hence the extra $500 (if you live in Alberta).
Upon receiving the Bitcoin, which we assume is worth $10,500, you record the transaction as business income (GST payable). Then you will have to remit the $500 GST in cash to the CRA at a future date. The Bitcoin is most likely capital property, but ultimately that determination turns on why and how the company holds and transacts crypto.
When the company converts the Bitcoin to cash or uses the Bitcoin to make a purchase, even if on the same day, a capital gain or loss will arise on the transaction; for instance, assume the Bitcoin lost value and was worth only $9,500 at the time of the conversion or purchase.
Now the company has a $500 loss, which is likely a capital loss, so only $250 is deductible. There could be a capital gain instead. While we are familiar with reporting cash on our taxes, crypto is relatively new and involves complex accounting and detailed tracking for reporting purposes.
Crypto and cash are vastly different, and both have advantages and disadvantages. Cash is centralized and offers stability, simplicity, and security. Crypto is decentralized, and offers efficiency, and possible anonymity, in exchange for fewer protections and high risk due to volatility. While crypto won’t replace cash (at least not any time soon due to the complex tax reporting rules), business owners should consider the potential risks as well as rewards when deciding whether to integrate crypto into their company.
At the end of the day, cash is still King!
Lisa Handfield, CPA, LL.M, TEP, founded The Calgary Legal Team. A former CRA auditor and Deloitte tax associate, she combines legal, tax and accounting expertise.
