Bitcoin broke a record this week and is now trading at an all-time high. Some experts believe the cryptocurrency could surge much higher in the months ahead. If past boom/bust cycles in Bitcoin are any indication, they’re probably right. However, whether Canadian investors can bet on Bitcoin through their Tax-Free Savings Account (TFSA) is up for debate.
If you’re looking into this market and wondering if there’s any potential tax savings, here’s what you need to know.
Why is Bitcoin surging?
At the time of writing, the price of a single Bitcoin is US$23,000 (CA$30,000). Over the past year, this price has roughly tripled. That’s because some institutional investors and major tech companies have adopted the digital currency this year.
PayPal and Square, for instance, have integrated BTC on their platform. Now users of these popular mobile wallets can buy and exchange the digital currency effortlessly. That’s added liquidity to the market.
Meanwhile, hedge fund titans Paul Tudo Jones and Stanley Druckenmiller have added exposure to the asset. One of them even compared it to the digital equivalent of gold. This week, Scott Minerd of Guggenheim Investments — one of the largest asset managers in the world — said his team estimates the price of a single Bitcoin could reach US$400,000 (CA$508,000) at some point.
The culmination of these factors has probably driven Bitcoin higher. It may be a good time to add some exposure. But if you’re expecting multibagger returns, you may also want to consider the tax implications.
Can you buy Bitcoin in your TFSA?
If Bitcoin really surges from $30,000 to over $500,000, it’s worth considering if the gains could be protected from the taxman. Now, strictly speaking, you cannot hold Bitcoin (or any other digital asset) in your TFSA directly. However, there are publicly listed proxies that could qualify.
The Bitcoin Fund (TSX:QBTC), for instance, is designed as an exchange-traded fund (ETF). Each unit of the fund represents 0.001116 BTC. This ETF is up 168% year to date, just like the digital asset in its portfolio.
In my opinion, this ETF should qualify for your TFSA. However, you may want to check with your accountant or financial advisor to be sure. Another alternative that could be more likely to qualify would be a listed Bitcoin mining stock.
HIVE Blockchain Technologies (TSXV:HIVE) owns and operates server farms that generate new BTC. Part of these freshly created digital assets are sold to fund expansion, while the rest are held in reserve. At the moment, HIVE has BTC reserves worth millions of dollars.
HIVE stock has done much better than Bitcoin itself. The stock is up a jaw-dropping 2,600% year to date. In other words, a $5,000 investment in HIVE at the start of this year would be worth $135,000 right now. If the stock was held in a TFSA, those gains would be tax-free right away.
Bitcoin may not qualify as an appropriate investment in your TFSA. But a BTC mining stock or ETF could be ideal.