City of Detroit Set to Accept Cryptocurrency for Municipal Tax Payments, Starting in 2025

What does this mean for Canadians Paying Municipal Tax in Detroit? Will other American and Canadian Cities Follow?

In recent years, the world of finance has seen a dramatic shift with the advent of cryptocurrencies. This digital currency phenomenon, led by Bitcoin and Ethereum, has not only transformed personal and business transactions but is now making inroads into municipal governance. Cities across the globe are exploring or implementing systems where residents can pay for city services using cryptocurrencies, signalling a potential shift in government policy in the potential usage of cryptocurrencies.

The Advantages and Disadvantages of Exchanging Crypto for City Services

The adoption of cryptocurrency for paying city services like taxes, utility bills, fines, and permits presents several advantages:

• Cities embracing cryptocurrency can attract tech industries and professionals, fostering an environment of innovation. For instance, Miami has been at the forefront, with Mayor Francis Suarez taking his salary in Bitcoin to promote the city as a tech hub.
• Cryptocurrencies offer an alternative for those who might be unbanked or underbanked, providing them with a means to engage with municipal services without traditional banking infrastructure.

However, there are concerns around accepting cryptocurrency in exchange for city services:

• The value of cryptocurrencies can fluctuate wildly in very short periods of time, posing a risk to local governments if they accept payments in crypto without immediate conversion to fiat currency.
• While blockchain is secure, the interfaces (like wallets and exchanges) through which transactions are managed can be vulnerable to hacks. This can prove devastating if such a hack were to occur to a government-managed account with potentially millions or billions of dollars in crypto.
• Payments to governments can be intercepted by third parties if one is not prudent about sending one's crypto to the correct address. This can pose a greater risk for those who are unfamiliar with crypto and the use of the blockchain.

Detroit Set to Accept Crypto in 2025

The holiday season brings good news for cryptocurrency holders in Detroit. Starting in 2025, residents will be able to pay their taxes and other city fees using cryptocurrency through a secure platform managed by PayPal. This initiative will make Detroit the largest U.S. city to accept cryptocurrency for tax payments. City Treasurer Nikhil Patel has announced that this option will be available in mid-2025, though no specific launch date has been set.

Other cities already accepting cryptocurrency for municipal payments include Williston, North Dakota, for utility bills, and Miami Lakes, Florida, for services like licenses and permits. Here in Canada, recent proposals by Vancouver Mayor Ken Sim suggest exploring the acceptance of Bitcoin for taxes and fees, aiming to diversify city reserves and embrace digital innovation.

Notably,  El Salvador is the first country to have legalized Bitcoin as legal tender. This was accomplished in September 2021 when the country passed the Bitcoin Law, making Bitcoin an official currency alongside the U.S. dollar.

The integration of cryptocurrencies into city services could redefine municipal finance, promote technological advancement, and perhaps even set new standards for government transparency and efficiency. Yet, the journey will require a balanced approach, ensuring that the drive towards digital payment solutions does not outpace the need for stability, security, and inclusivity in public finance. As the political landscape shifts in the U.S. and crypto knowledge becomes more widespread, crypto looks to be on an upward trajectory in terms of its acceptance by government to pay government debts.

Tax Implications for Canadians Paying Detroit Taxes Using Crypto

Take for example a Canadian resident from Windsor with a property in Detroit, using crypto to pay for their Detroit taxes. What Canadian tax implications might arise? In Canada, Bitcoin and other cryptocurrencies are considered property, not currency, for tax purposes. This means any transaction involving crypto can result in capital gains or losses or business income or losses.

If you use crypto to pay Detroit property taxes, or other expenses or amounts, including purchases, you must calculate the fair market value of the crypto at the time that you spend the crypto to pay the taxes or other expenses and your adjusted cost base for that same coin.

The difference between the two will be your capital gain or capital loss, or business income or loss, from the disposition of that coin. Calculating the adjusted cost base for a crypto token is not always a straightforward analysis depending on the type of crypto token involved. If you are unsure how to calculate it, it is always best to first contact an expert Canadian tax lawyer for advice to minimize the risk of reassessment.

Pro Tax Tip: Utilize Tax Loss Harvesting for Crypto Payments

If you're contemplating using cryptocurrencies like Bitcoin or Ethereum to pay for taxes or other municipal fees in cities like Detroit, where such payments are accepted, consider this opportunity for tax loss harvesting:

• Assess Your Crypto Portfolio: Before making payments, review your crypto holdings. If some of your cryptocurrencies have depreciated in value since you acquired them, you might be sitting on unrealized losses.
• Use Losses to Offset Gains: When you use depreciated crypto to pay for city services, you technically 'sell' or 'dispose' of that asset at its current market value. If this value is less than your purchase price, you realize a capital loss. This loss can be used to offset any capital gains you might have from other investments, including other cryptocurrencies or traditional assets like stocks.

It is important to note that this article does not provide legal or financial advice. If you would like to employ this strategy but are unsure of the implications, it is best to first consult with an expert Canadian crypto tax lawyer.

FAQ:

Does Canada Accept Crypto as Legal Tender in Any Capacity?  

The Canadian government does not accept cryptocurrency as legal tender for any official payments such as taxes or government services. Cryptocurrencies are not considered legal tender in Canada; only banknotes issued by the Bank of Canada and coins minted by the Royal Canadian Mint are recognized as such. However, some retail businesses in Canada might accept cryptocurrencies for payment, but this is not at a governmental level.

Can I use any cryptocurrency to pay for city services, or only Bitcoin?

This depends on the city's policy. Some might only accept Bitcoin, while others could accept a range of cryptocurrencies like Ethereum or Litecoin. Always check the specific guidelines of each city to see the applicable rules, or book a consultation with an expert tax lawyer in the region to determine the applicable rules.

DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.