Cryptocurrencies have become hot investment properties in recent years, with many individuals seeking to get in relatively early on this emerging digital asset class. As the use of cryptocurrencies grows, tax authorities around the world are taking notice and seeking to ensure compliance with their tax laws.
The Canada Revenue Agency (CRA) has been actively scrutinizing cryptocurrency transactions and conducting audits to ensure taxpayers are reporting their crypto-related income accurately. Here’s a quick guide on what you need to know to both avoid and respond to a CRA cryptocurrency audit.
Tax Treatment of Cryptocurrencies
The CRA considers cryptocurrencies, such as Bitcoin, Ethereum, and others, to be a form of capital property for tax purposes.
This means that any gains or losses from cryptocurrency transactions are generally subject to taxation. When you buy, sell, use, or earn income from cryptocurrencies (through mining or staking activities, for example), you may likely trigger taxable events that need to be reported in your tax return.
Failing to report cryptocurrency transactions accurately can potentially result in audits that lead to penalties, interest, and even criminal charges.
Record-Keeping Requirements
As with all tax-related documentation, it’s crucial that if you are involved in cryptocurrency transactions that you maintain detailed and accurate records. This includes a comprehensive transaction history, receipts, exchange statements, and any other relevant documents.
Proper record- and bookkeeping processes are also essential in case you face an audit. Failing to do so can significantly compromise your ability to defend your tax reporting choices.
Avoiding a CRA Cryptocurrency Audit Using The Voluntary Disclosure Program
Taxpayers who have not accurately reported their cryptocurrency activities in previous years can take advantage of the CRA’s Voluntary Disclosure Program (VDP). The VDP allows individuals to come forward voluntarily and correct their tax filings, usually with reduced penalties and potential criminal prosecution immunity. However, once the CRA initiates an audit or investigation, the VDP is no longer an option.
CRA’s Automated for Audit Selection Tools
To identify potential non-compliance, the CRA employs various data-matching techniques and information sharing with other agencies and financial institutions.
Cryptocurrency exchanges are required to report certain customer information to the CRA, including transaction details and account balances. The CRA can cross-reference this information with a taxpayer’s reported income, tax reporting history, and personal information as intimate as your home address, personal assets, and social media posts to identify discrepancies.
Risk Assessment and Audits
The CRA also uses an automated, risk-based system for selecting taxpayers for audits and investigations, and a large number of cryptocurrency transactions can certainly invite scrutiny.
Other crypto-related activities that may trigger a CRA audit include significant discrepancies between reported income and spending patterns or engaging in complex crypto-related transactions.
If you are selected for an audit, there is no alternative but to seek guidance and possibly representation from a Canadian tax lawyer that specializes in cryptocurrency audits and tax reporting.
Penalties and Consequences
Penalties for failing to accurately report cryptocurrency transactions can range from a percentage of the taxes owed to substantial fines.
In severe cases of non-compliance, the CRA can pursue criminal charges and even imprisonment upon conviction.
The Financial Necessity of Professional Crypto-Tax Help
Seeking professional advice from tax experts who specialize in cryptocurrency taxation in Canada can help you optimize your available tax reduction opportunities, ensure compliance with CRA regulations, and create a tax-saving plan for your current financial position and desired financial goals.