What is a virtual currency?
Virtual currencies such as Bitcoin are also known as digital currencies or cryptocurrencies. They are created by computer program algorithms. Virtual currency is virtual money that is transferred electronically among users. Virtual currencies can be exchanged for traditional currencies. You can also buy and sell virtual currencies on open exchanges that have been created especially for virtual currencies. You can store virtual currencies in a virtual or digital wallet and use them to buy goods and services on the Internet and in stores which accept these currencies.
No single organization controls any virtual currency. Instead, they are based on a decentralized, peer-to-peer (P2P) network. The “peers” are the users that take part in transactions, and their computers make up the network. There may be measures in place to protect the system. For example, a record of every virtual transaction is made publicly available to try to prevent the fraudulent copying of virtual currency units.
Are virtual currencies legal tender?
Virtual currencies are not official currencies and are not considered legal tender in Canada. There is no regulatory oversight over virtual currencies and they are not supported by any government or central authority, such as the Bank of Canada.
Financial institutions, such as banks or credit unions, are not involved in virtual currency transactions, management or oversight.
What are the risks of virtual currencies?
Units of virtual currency can carry certain risks. For example, virtual currencies:
- are not covered by deposit insurance by the federal or provincial governments. For example, the Canada Deposit Insurance Corporation (CDIC) only covers deposits in Canadian dollars at member financial institutions, such as federally regulated banks and credit unions. CDIC’s coverage of up to $100,000 for eligible deposits only relates to the failure of a member institution. It does not cover losses due to fraud.
- may provide you with limited legal recourse if:
- you don’t receive the goods or services you purchased with virtual currency
- the virtual currency exchange holding your funds fails, or
- you don’t receive the virtual currency you purchased.
- can expose consumers to financial risk, since their value can be very volatile. Virtual currencies can be seen as a high-risk asset since their value can increase or decrease unpredictably over a very short period of time according to demand by users.
- can be difficult to get and use. You may not be able to easily exchange your virtual funds for a traditional currency or to purchase goods and services.
- can be vulnerable to fraud, theft and hackers, and they are sometimes used to support illegal activities.
- can present some privacy concerns, since in some cases, your personal information can be linked to your digital wallet.
Virtual currencies and taxes
Using virtual currencies does not exempt consumers from Canadian tax obligations.
Virtual currencies are considered a commodity and are subject to the barter rules of the Income Tax Act. This means that if you use these currencies to purchase goods or services, or you recorded a gain or loss from selling or buying them, this information should be included on your taxes. Not reporting income from such transactions is illegal. GST/HST applies on the fair market value of any virtual currency used to pay for goods or services.
Learn more about the Canada Revenue Agency’s reporting requirements for virtual currencies.
Tips for using virtual currencies
First, make sure you consider all the risks and benefits of virtual currencies. If you do decide to use them, here are few tips to help protect yourself:
- Be sure to wait for multiple confirmations before completing a transaction. This will decrease your risk of fraud due to a reversed transaction. It can take 10 minutes or more for a virtual currency transaction to be confirmed. During that time, a transaction could be reversed and you could lose your funds to a dishonest user.
- Store the key or password for accessing your virtual currency wallet on a separate computer that does not contain your virtual currency wallet.
- Keep your virtual currency wallet on a separate hard drive or a computer that is not connected to the Internet. Only transfer your virtual currency to an Internet-connected device when you need to complete an online transaction. This will help protect the contents of your wallet from hackers and malware.