Risky Fad or Currency of the Future?

November 23, 2017

Bitcoin is the most well-known example of a virtual currency, a relatively recent form of electronic payment with hundreds of varieties growing in popularity throughout Canada and around the world.

Virtual currencies are not legal tender and do not exist in the form of coins or bills. They are a form of electronic money that may be used to pay for goods or services if the seller is willing to accept them as payment. All parties involved in the transaction must also agree on the virtual currency’s value, which may fluctuate significantly based on its relative popularity at the time.

The regulations that protect and secure traditional currencies such as the Canadian dollar do not, for the most part, apply to virtual currencies. This makes virtual currencies an especially risky purchase as there is typically no recourse if you encounter any issues. For example, if you make a purchase using virtual currency and are mistakenly charged a higher price, you have no means of getting back the difference. In extreme cases, a virtual currency may fail, which means any real money you’ve spent to acquire it is simply lost.

This lack of regulation and oversight also makes virtual currencies popular with criminals, which can expose you to significant risk when trying to purchase, spend, or sell virtual currency.

How do I get virtual currency?

Users create or earn virtual currency in a variety of ways. For example, users can earn Bitcoins by running power-intensive software on their computers to validate Bitcoin transactions. Basically, users are paid in Bitcoins for allowing their computers to be used to power this process, known as mining. Litecoin is created using a similar system but offers users more and faster rewards, while Zcash does the same with an emphasis on maintaining user privacy. These and most virtual currencies can also be purchased using an online exchange. Some, such as Ethereum, must be purchased in this manner.

Where is virtual currency stored?

Once you have some virtual currency, you store it in any of the wide variety of virtual wallets. You may choose to save your virtual wallet on your computer’s hard drive, but if you lose access to the files on your computer, that virtual currency is gone. A more popular option is a cloud-based virtual wallet, but even these are not protected. If a criminal manages to access your wallet and steal your virtual currency, it is gone.

Are virtual currencies taxed?

In Canada, barter and trade transactions are subject to tax regulations and any transactions using a virtual currency fall under this category. You are required by law to declare any income earned or expenses paid by bartering or trading, even if no real money changed hands.

To declare virtual currency transactions as personal income or expenses, you must indicate what the value would have been had you used Canadian dollars. This may be complicated to determine and conflict with the actual value of your virtual currency. For example, if you sell a vehicle and are paid in virtual currency, your declared income must be what you could have earned selling that vehicle for real money.

If your business uses a virtual currency, the value you indicate for any income or expenses must be based on the virtual currency’s exchange rate in Canadian dollars on the day each transaction was made.
Capital gains taxes also apply if you buy and sell virtual currency using real money and earn a profit.

What does the future hold for virtual currency?

No one can say for certain what role virtual currency will have in future commerce, especially as governments increasingly move to regulate and standardize the virtual currency marketplace. Significant ups and downs in their value create a high level of risk if you are considering using or investing in virtual currencies. However, the increasing popularity of virtual currencies such as Bitcoin, Dash, Ripple, Monero, and countless others suggests the idea is here to stay.

As virtual currencies become more accepted, it is possible they will join the long list of popular options to exchange goods and services without using real money. In the future, Canadians may use virtual currencies without a second thought in the same way they might trade reward points for a plane ticket or hotel accommodations today.