Cryptocurrency Mining as a Service

The CRA treats cryptocurrency mining as an activity that generates or produces inventory—namely, the cryptocurrency (CRA document no. 2014-0525191E5, "Virtual Currencies (Bitcoins)," March 28, 2014). Accordingly, the mining of a cryptocurrency generates business income only when the cryptocurrency is sold. An alternative view—that cryptocurrency mining is a service provided by the miner to the blockchain network—produces very different tax results.

The function of cryptocurrency mining in the blockchain ecosystem is to provide computing power to the network in order to verify and record transactions on the blockchain. This function is in the nature of a service that the miner provides to the blockchain network in exchange for the cryptocurrency compensation. Further, the blockchain network could be recognized as a service recipient—either as an unincorporated association of participants (who are identifiable) or as a stand-alone organization. Most tax authorities currently reject this view (see, for example, the German Federal Ministry of Finance and the Australian Taxation Office).

The tax implications of this view depend, in part, on whether one considers cryptocurrency a commodity or a currency. Although the CRA has viewed it as a commodity, this issue is in flux: at the March 2018 Canadian Bar Association round table, the CRA said (at question 7) that it is considering whether payments in cryptocurrencies could be an exempt supply of a financial service (that is, of money or similar instruments) for the purposes of the GST/HST.

There are several implications for the cryptocurrency miner if its activities are viewed as the rendering of a service:

  • At the time the service is rendered by the miner, there will be immediate revenue recognition. This differs from the CRA's current view, which delays revenue recognition until the cryptocurrency is sold. The amount of revenue depends on one's view of cryptocurrency: if it is a currency, the revenue is the value of the cryptocurrency; if it is a commodity, the revenue is the FMV of the service being provided. The latter value will be difficult to measure, but it should be at least equal to the electricity costs incurred; since these are variable costs in economic terms, a miner not getting at least that much revenue in return would shut down.
  • Miners can argue for capital gains treatment of any increase in the value of the currency between the time that it was generated and the time of its disposition (using the criteria in Interpretation Bulletin IT-479R, "Transactions in Securities," February 29, 1984). This situation-specific result will apply regardless of whether the cryptocurrency is a commodity or a currency. In the CRA's current view, a sale of cryptocurrency attracts income treatment (as a sale of inventory).
  • The mining service will not be a taxable supply for GST/HST purposes—at least, if the cryptocurrency is viewed as a currency, because it will be an exempt supply of a financial service. (For a discussion of the outcome when the cryptocurrency is viewed as a commodity, see "Making or Accepting Payment in Crypto: A GST/HST Risk?" Canadian Tax Focus, February 2018.)
For the blockchain itself, the question posed by the view of mining as a service is whether the blockchain is a person capable of being GST/HST-registered, or even a person subject to income tax. This question will become more relevant as we see further attempts at creating organizations in which decentralized control over operations is run entirely by smart contracts—the DAO (decentralized autonomous organization) being one well-known and unsuccessful example.

Laura Gheorghiu
Gowling WLG LLP, Montreal

Canadian Tax Focus
Volume 9, Number 1, February 2019
©2019, Canadian Tax Foundation