Just in time for tax season, the Canada Revenue Agency says the users of bitcoins will have to pay tax on transactions in the upstart digital currency.

Bitcoins are a fringe online currency that entered the mainstream this year after speculators rushed in and caused their value to more than quadruple in value. Originally designed as a virtual currency alternative to conventional money, the cash value of a bitcoin jumped from under $50 US to above $250 and back earlier this month, as speculators flooded the market after awareness of them grew.

Price swings like that mean some bitcoin buyers and sellers likely made or lost a lot of money, which raises the question of how that will be handled come tax time.

The issue is not just academic. Saskatoon realtor Paul Chavady said he has listed a house priced in bitcoins, and has found clients willing to pay his fees in the electronic currency.

"When you sell [the bitcoins], they will deposit that in your account," said Chavady. "As soon as it turns into Canadian dollars, it's back in the eyes of the CRA and everybody else. If you get a big deposit of $10,000, or $100,000, [CRA is] going to say, 'Hey, where did that come from?'"

Indeed, the tax man has already thought of that.

The CRA told the CBC there are two separate tax rules that apply to the electronic currency, depending on whether they are used as money to buy things or if they were merely bought and sold for speculative purposes.

"Barter transaction rules apply where bitcoins are used to purchase goods or services," Canada Revenue Agency spokesman Philippe Brideau said in an email.

Barter is the exchange of one good for another good without the use of cash, such as when a farmer who grows vegetables trades with another who raises chickens. Many Canadians don't realize such exchanges are taxable, but they are.

Paragraph 3 of the CRA's Interpretation Bulletin IT-490 clearly states that in a barter transaction between arm’s-length persons, "we generally consider that the value of whatever is received is at least equal to the value of whatever is given up."

In the above example, that means whatever you've received in exchange for your $1 worth of vegetables must be documented as a taxable gain of at least $1 somewhere.

Investing gains

When it comes to trading bitcoins for profit, the tax man says there are tax implications there, too.

"When bitcoins are bought or sold like a commodity, any resulting gains or losses could be income or capital for the taxpayer depending on the specific facts," ruled the CRA.

That section is covered in paragraphs nine through 32 of the CRA's section IT-479R, Transactions in Securities, "which provide general comments for purposes of determining whether transactions are income or capital in nature."

Regina currency trader Jeff Cliff already had that figured out. He's been trading bitcoins for three years and said he claims them on his taxes by converting it to the Canadian dollar equivalent. But, Cliff said, it is an honour system.

"It's fairly anonymous system," he said. "I'm not so much into the privacy side of it, so that's why I claim it."

Some advocates of the electronic currency, which only exists as unique codes in complex crytpographic algorithms, have said one of its advantages is that it can be traded and moved across national boundaries without governments being aware.

But as the CRA statement shows, governments are starting to pay attention.