Canadian Tax Implications of Vitalik Buterin’s Short-lived Love Story with Shiba Inu (SHIB)
By Turing Research Network
Author: @Windfall_Crypto (Twitter Profile). Make sure to follow him on Twitter.
Cryptocurrencies are all fun and games, but they nonetheless produce (in Canada, at least) very real tax consequences.
In a recent video, Charles Hoskinson, the founder of Cardano, questioned his viewers about the potential Canadian tax consequences of the recent events surrounding Shiba Inu (“SHIB”) and Vitalik Buterin.
As a cryptocurrency enthusiast and a Canadian tax lawyer, I’d like to share my own personal view on the recent events.
As Charles mentioned in his video, what happened raises some very interesting questions from a tax perspective and I hope the below analysis will turn out to be a fascinating read for everyone.
Before we dive in, please note that the below analysis should not be viewed as a legal opinion. It was made for information purposes only based on the my own interpretation of the facts gathered from public sources.
SHIB describes itself as “an experiment in decentralized spontaneous community building” 
With that in mind, three of the founder’s early moves upon the creation of the token were to:
- Create a Uniswap pool for SHIB (the “Uniswap Pool”) and use 49.5% of SHIB supply and 10 ETH as initial liquidity (the “Pool Inception”). According to Etherscan, the Pool Inception happened during the evening of July 31, 2020. On that day, ETH price closed at USD $345.55. Hence, although the author ignores SHIB initial price on Uniswap upon the Pool Inception, it can be reasonably estimated that the total liquidity of the Uniswap Pool at that moment was worth about USD $6,910, i.e. USD $3,455, the value of the 10 ETH, times two (as one of the fundamental principle to providing liquidity in an “automated market making” pool is to pool the same USD value of both assets).
- Following the Pool Inception, the totality of the LP tokens received by SHIB’s founder were transferred to Vitalik’s Ethereum wallet  (the “LP Tokens Burn”). The impact of that transaction effectively gave Vitalik control over 100 % of the Uniswap Pool’s liquidity.
- In a series of three transactions, the remaining 50.5% of SHIB’s supply was “burned” by SHIB’s founder by sending the tokens to, again, Vitalik’s Ethereum wallet  (the “SHIB Burn”).
The operations outlined above all took place between July 31, 2020 and August 2, 2020.
At that time, it is reasonable to say that Vitalik controls pretty much 100 % of SHIB’s supply, either indirectly through his LP tokens of the Uniswap Pool or his direct holdings.
Fast-forward to 2021, SHIB is taking off and the USD value of Vitalik’s SHIB holdings are rapidly getting massive. At one point, SHIB is so popular that it is contributing to the recent Ethereum’s network congestion 
Then, to everyone’s surprise, Vitalik reminded the world that when you own the keys to a cryptocurrency wallet, you very much own its content.
On May 12, 2021, Vitalik redeemed his SHIB LP tokens from the Uniswap Pool . What was initially worth 495,000,000,000,000 SHIB and 10 ETH was now worth 2,193,612,748,362 SHIB (-99.56%) and 13,291 ETH (+132,810%).
That is 50.3M USD worth of ETH alone 
Vitalik did not stop there. According to website TheStreet, the following operations then took place :
“Buterin has sent 13,292 ETH worth $54 million, at the time of the transaction, to Givewell, a non-profit organization that evaluates the effectiveness of charities. He sent approximately $336 million worth of ELON to the Methuselah Foundation, a non-profit dedicated to tissue engineering and making “90 the new 50 by 2030.”
He gave another 1050 ETH worth over $4.2 million to the AI Safety Organization. Finally, he sent 500 ETH and over 50 trillion SHIB worth around $1.14 billion, at the time of the transaction, to the India Covid-Crypto Relief Fund. […]
In total, Buterin gave away over $1.5 billion in crypto donations at the time of the transactions.”
In my analysis below I will refer below to those operations below as the “Donation Transactions”.
Now that we have outlined the main elements of the story, let’s talk about Canadian tax implications.
In his video, Charles Hoskinson raises mainly two questions:
1. What are, for Vitalik, the Canadian tax consequences of the LP Tokens Burn and of the SHIB Burn?
2. What are, for Vitalik, the Canadian tax consequences of the Donation Transactions?
For the purposes of the below analysis, I am assuming, among other things, that;
(i) the wallet 0xAb5801a7D398351b8bE11C439e05C5B3259aeC9B (“0xAb5”) is owned by Vitalik, (ii) at all times Vitalik has been the true owner of the cryptocurrencies held in the wallet 0xAb5, (iii) Vitalik is a tax resident of Canada and, for Canadian tax purposes, a resident of the Province of Ontario, (iv) the creation of SHIB, the LP Tokens Burn and the SHIB Burn were unbeknownst to Vitalik when they took place, (v) all operations in relation to tokens that are connected to the Donation Transactions that are similar to the LP Tokens Burn and the SHIB Burn were unbeknownst to Vitalik when they took place, (vi) the cryptocurrencies held in wallet 0xAb5 constitute capital property in the hands of Vitalik.
Finally, for the sake of simplicity, I will not take into account the potential application of the “adjusted cost base averaging rule” to any cryptocurrency held in wallet 0xAb5.
Consequences of the LP Tokens Burn and the SHIB Burn
Based on my understanding of the facts, the LP Tokens Burn and the SHIB Burn should constitute a gift from SHIB’s founder to Vitalik under applicable Canadian laws.
As the term “gift” is not defined in the Income Tax Act (Canada) (the “Tax Act”), the Canada Revenue Agency (the “CRA”), which is the Canadian equivalent of USA’s Internal Revenue Service, refers to the criteria established by Canadian case law to determine what constitutes a gift:
“In common law jurisdictions, the courts have said that a bona fide gift exists when:
• There is a voluntary transfer of property,
• A donor freely disposes of his or her property to a donee, and
• The donee confers no right, privilege, material benefit, or advantage on the donor or on a person designated by the donor.” 
Those criteria seem to be met in this case.
The consequences to Vitalik for receiving such gift, i.e. the LP Tokens Burn and the SHIB Burn, are stated in section 69 of the Tax Act:
“69 (1) Except as expressly otherwise provided in this Act, […]
(c) where a taxpayer acquires a property by way of gift, bequest or inheritance or because of a disposition that does not result in a change in the beneficial ownership of the property, the taxpayer is deemed to acquire the property at its fair market value.” [My emphasis]
Contrary to the USA, there is no gift tax in Canada applicable to the donee (Vitalik here).
Hence, in this case there should be no tax consequence for Vitalik when he was first gifted 50.5% of SHIB’s supply and the LP tokens of the Uniswap Pool representing 49.5% of SHIB’s supply and 10 ETH (the “Gifted Assets”).
That being said, by virtue of section 69 of the Tax Act, Vitalik was deemed to have acquired those tokens for their “fair market value”.
Now, that is not a determination that is necessarily easy to make and what is the fair market value of a given property is often a cause of disagreements between the taxpayers and the tax authorities. In general however, the CRA will apply the following principle:
“[…]the term “fair market value” means “the highest price, expressed in terms of money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party under any compulsion to transact.”” 
In this case, considering that the LP Tokens Burn and the SHIB Burn took place upon the creation of SHIB at a time where, as per the understanding of the author, there was no market for SHIB yet, it would seem reasonable to take the position that the SHIB tokens received by Vitalik had a marginal value of about USD $1730 (i.e. about the same USD as the SHIB comprising the LP tokens gifted to Vitalik).
Hence, the fair market value of the Gifted Assets may be reasonably appraised to about USD $5,185 (USD $1,730 for the SHIB tokens held in wallet 0xAb5 and USD $3,455 for the LP tokens as discussed above).
That amount would then constitute, for Canadian tax purposes, the cost basis of the Gifted Assets for Vitalik. 
Consequences of the Donation Transactions
Now that we have determined the cost basis of the Gifted Assets, let’s discuss the tax consequences of the Donation Transactions. This is where things are getting interesting.
As for the LP Tokens Burn and the SHIB Burn, the facts publicly available indicate that the Donation Transactions constitute a gift from Vitalik to different organizations as per the criteria discussed above set out by Canadian case law.
By virtue of section 69 of the Tax Act, by doing the Donation Transactions, Vitalik effectively disposed, for tax purposes, of certain assets in favor of certain organizations:
“69 (1) Except as expressly otherwise provided in this Act, […]
(b) where a taxpayer has disposed of anything […]
(ii) to any person by way of gift,
the taxpayer shall be deemed to have received proceeds of disposition therefor equal to that fair market value;”
Essentially, a disposition by way of gift is still a disposition within the meaning of the Tax Act and produces the same tax consequences as would a sale of the assets on the open market.
Now, based on the article published by TheStreet and mentioned above, we know that Vitalik gifted 14,842 ETH to three different organizations after redeeming his LP tokens from the Uniswap Pool. Considering the liquidity of ETH, it would be fair to assume that the fair market value of that gift was of about USD $56.2M. 
In Canada, when a disposition of cryptocurrencies held as capital property happens, this triggers a capital gain or loss. In the case of a capital gain, 50% of it is taxable at the marginal rate of the given taxpayer. In this case, considering that the cost basis of those ETH (or of the LP tokens redeemed) is virtually nil for Vitalik, the potential tax liability for the operations leading to that gift is of about USD $15M.
This amount is the result of the following formula:
“USD $56.2M (fair market value) – USD $0 (nominal cost basis)] * 50% (only half of the capital gain is taxable) * 53.53% (highest combined federal and Ontario marginal tax rate for 2021)”.
Now the real business. According to TheStreet, the value of the memes tokens (including a part of SHIB’s supply) that were gifted in the course of the Donation Transactions is of about USD $1.45B.
Again, the cost basis of those tokens for Vitalik is virtually nil. This means a potential tax liability of USD $386M when applying the formula outlined above.
This is massive. Accounting for the meme tokens and the ETH, the potential tax liability resulting from the Donation Transactions could be of about USD $400M.
With that being said, let’s see if we can bring that number down a bit.
The first element to consider is whether or not the fair market value of the meme tokens was really of USD $1.45B. In the opinion of the author a strong argument exists to say that it was not the case.
Those meme tokens all have a massive supply. Hence, a small fluctuation of their price can have a big impact on their market cap, and when you own half of the supply, it means a big impact on the paper value of your holdings.
The liquidity of those assets when considering their total supply is pretty thin and there is no way someone holding an important percentage of their supply would get an amount comparable to the formula of “last price * supply owned” if it were to sell them on the market in one go.
That being said, the determination of the fair market value would be a question of facts and would need to be made by an expert. Let’s remind ourselves that the test applied by the CRA is “the highest price, expressed in terms of money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party under any compulsion to transact.”
This determination would not be an easy one to make, but in my view, I think it is reasonable to assume that the potential tax liability of USD $400M outlined above really is the “worst case scenario”.
The second element to take into account is whether or not cryptocurrencies gifted in the course of the Donation Transactions were gifted to organizations that would be, for the purposes of the Tax Act, a registered charity or a qualified donee.
If that is the case, those organizations would then be able to deliver official donation receipts to Vitalik that qualify for non-refundable charitable tax credits in Canada (the “Charitable Tax Credits”).
This value indicated on the donation receipts would correspond to the fair market value of the cryptocurrencies received by each of those organizations (again, this determination would not be an easy one to make by the organizations!).
The impact of a donation to a registered charity or qualified donee would mean that although capital gains tax would be payable on the gifts, at least Vitalik would be able to recover some or all of the income tax triggered by the gifts by way of Charitable Tax Credits.
The Charitable Tax Credits rate for a resident of the Province of Ontario with the highest tax bracket is of about 40% . This means that although every dollar of cryptocurrencies gifted could cost USD $0.2667 of income tax, they would allow for the claim of USD $0.40 in Charitable Tax Credits.
In this case, it means that the “net tax gain” for Vitalik could theoretically be of about USD $200M in the scenario where the fair market value of the cryptocurrencies gifted is USD 1.5B, being USD $600M of Charitable Tax Credits minus about USD $400M of income tax.
As the Charitable Tax Credits are non-refundable, Vitalik would need to have sufficient taxable income to fully benefit from them. In theory however, and although it could necessitate a bit of planning, this should not be an issue as Vitalik could simply trigger the latent income tax on some of his other cryptocurrency holdings to increase his taxable income.
It is important to note that there is a cap to the amount of Charitable Tax Credits that a taxpayer can claim in a year. Generally, those credits can only be claimed on an “eligible amount” corresponding to a maximum of 75% of the net income of a taxpayer in a year. However, a taxpayer can carry forward unused donations for up to 5 years.
This current situation involving Vitalik, SHIB and other meme tokens is pretty fascinating from a tax perspective.
If my assumptions and understanding of the facts are close to reality, on May 12, 2021 Vitalik has either:
1. Triggered a massive Canadian tax liability, potentially north of USD $400M, by donating ETH and meme tokens to different organizations; or
2. If the gifts were made to registered charities or qualified donees for Canadian tax purposes, Vitalik could currently be sitting on a gold mine in the form of non-refundable charitable tax credits and could potentially make a “net tax gain” of about USD $200M.
It will be interesting to see how the situation unfolds. In any case, and on a personal note, I hope that Vitalik has consulted his tax professionals before moving forward with the Donation Transactions. If that’s not the case, I’ll be happy to assist.
Also, I want to remind readers of this article that if the facts and assumptions outlined above are not accurate, the end-result could be very different and potentially less “catastrophic” than a potential USD $400M Canadian tax bill. For example, Vitalik may not be a Canadian tax resident, the ownership of the gifted assets may have been transferred at an earlier date than what was registered on-chain, etc.
Nonetheless, I hope the above was a great read and acted as a reminder to everyone that cryptocurrency transactions have real tax implications.
If you have any questions or comments on the above, please do not hesitate to contact me on Twitter @Windfall_Crypto.
- 2. https://en.wikipedia.org/wiki/Shiba_Inu_coin [consulted on May 13, 2021]
- 3. https://etherscan.io/token/0x95ad61b0a150d79219dcf64e1e6cc01f0b64c4ce
- 4. See https://www.shibatoken.com/ under the heading “Ecosystem” [consulted on May 13, 2021]
- 5. https://etherscan.io/tx/0x7f1be2ac40313400c83f23fbe3926bf6bf1d6b2b363264b3016444ea28fe21c7
- 6. https://coinmarketcap.com/currencies/ethereum/historical-data/ [consulted on May 13, 2021]
- 7. https://etherscan.io/tx/0xabc68f7d712a1552468331c6ec29f5c112bb500ed5ffa660fe2b5af378921e37
- 8. See https://etherscan.io/tx/0x8bbc79a042b75f50a819a30190c3f3b32a5ad5fda0988c3a6d8fe78a3a4ca329, https://etherscan.io/tx/0x3f551b5058ac4d2fa8243d7b724339a4d83af10436dbcb04e07e5ece52206036 and https://etherscan.io/tx/0x173e8e5d1bcdc8123bd4777926c392a081db5f6c3bfe50c501614c3117b13c4c
- 9. https://cryptoslate.com/ethereum-fees-skyrocket-as-a-doge-knock-off-surges-32500-in-30-days/
- 10. https://etherscan.io/tx/0x71e50404da3110e00eff2e6b33c162959507059cf7bbc1841130fe9c13171978
- 11. 13,291 ETH x USD $3,785.85, which is the closing price of ETH on May 12, 2021 on https://coinmarketcap.com/currencies/ethereum/historical-data/
- 12. https://www.thestreet.com/crypto/ethereum/vitalik-buterin-gives-1-billion-to-india-covid-relief-after-memecoin-selloff
- 13. Canada Revenue Agency, Income Tax Folio S3-F9-C1 – Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime, par. 1.3, https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plans-folio-9-miscellaneous-payments-receipts/income-tax-folio-s3-f9-c1-lottery-winnings-miscellaneous-receipts-income-losses-crime.html [consulted on May 13, 2021]
- 14. CRA Views, Tech Interp (external), 2003–0050735 – Fair market value, December 19, 2003
- 15. It is important to note that Vitalik was gifted over time, and in a manner similar to the LP Tokens Burn and the SHIB Burn, an important percentage of the supply of different crypto assets. For sake of simplicity, the author will limit the example of the determination of the cost basis to SHIB only. The element to keep in mind is that considering the way those operations were conducted, the cost basis for Vitalik is virtually nil in comparison to the fair market value of the assets gifted by Vitalik in the course of the Donation Transactions.
- 16. 14,842 ETH x USD $3,785.85, which is the closing price of ETH on May 12, 2021 on https://coinmarketcap.com/currencies/ethereum/historical-data/
- 17. https://www.canada.ca/en/revenue-agency/services/charities-giving/giving-charity-information-donors/claiming-charitable-tax-credits/charitable-donation-tax-credit-rates.html
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