Global Law Experts Logo

Find a Global Law Expert

Specialism
Country
Practice Area

Awards

Since 2010, the Global Law Experts annual awards have been celebrating excellence, innovation and performance across the legal communities from around the world.

David Rotfleisch’s Primer on How to Handle a Cryptocurrency Tax Audit: A Canadian Tax Lawyer’s Advice, Tips

posted 2 years ago

The Canada Revenue Agency (CRA) is becoming more meticulous when reviewing cryptocurrency tax returns.

Monitoring cryptocurrency dealers has become increasingly important to tax authorities and regulatory bodies around the world in recent years. Notably, the Canada Revenue Agency (CRA) and the Internal Revenue Service (IRS) in the United States have adopted active initiatives to solve this issue. Identifying taxpayers during a tax audit focusing on cryptocurrency activities in Canada is difficult due to the anonymous nature of cryptocurrency transactions, which is a big challenge for Canadian cryptocurrency tax agencies.

In order to gather data on all US users of Coinbase who had transacted in Bitcoin between 2013 and 2015, the Internal Revenue Service (IRS) filed a broad summons in 2016. This summons became known as the “John Doe” summons. As predicted, the Federal Court of Canada approved an order in March 2021 enabling the Canada Revenue Agency (CRA) to ask Coinsquare Ltd., the biggest cryptocurrency exchange in Canada, for particular information about cryptocurrency dealers.

Despite first refusing the order, Coinsquare and the CRA ultimately came to an agreement whereby Coinsquare will supply the CRA with specific user data going back to 2014. With access to this data and the shared taxpayer data from the IRS, the CRA is likely to be able to identify anyone who failed to accurately disclose their cryptocurrency transactions. As a result, more cryptocurrency tax audits are anticipated.

Frequently asked CRA cryptocurrency audit queries

Recently, the Canada Revenue Agency (CRA) began the task of conducting cryptocurrency tax audits for anyone who engages in Bitcoin transactions. Taxpayers will receive full questionnaires for this audit that are 13 pages long and contain 54 questions. These inquiries deal with a variety of topics, including investments, past mining operations, possessions, wallets, and other pertinent issues. The following are a few illustrations of the kinds of inquiries found in the CRA’s crypto tax audit questionnaire:

  • When did you initially begin participating in the Bitcoin industry, and what prompted you to get involved?
  • Are you currently involved in mining or investing in cryptocurrencies? Do you have any additional responsibilities or activities in the cryptocurrency industry, such as consulting, teaching, running a bitcoin ATM service, selling hash power, managing an exchange, joining a mining pool, or engaging in any other business endeavors?
  • Have you experienced any cryptocurrency tumblers or mixing services? If so, kindly give more information about the specific services you have utilized. Please also send us a list of all the cryptocurrency addresses you used for mixing, as well as the tracing history. Could you also provide some background on why you utilize these services?
  • Have you ever exchanged cryptocurrencies using a site like Shapeshift or Changelly? If yes, kindly give us the dates on which these “swap” deals were executed as well as the bitcoin addresses linked to your transactions.
  • Can you give a brief description of every cryptocurrency you now own? Also, send us a timeline detailing the dates of each purchase you made when changing fiat money to

Taxation of cryptocurrency gains

Depending on the specifics of each situation, the tax treatment of income from cryptocurrency transactions, such as cryptocurrency trading or cryptocurrency mining, can vary. The treatment of these gains for taxation purposes is based on a number of variables.

Gains for those who trade cryptocurrencies can be classified as either business income or capital gains. The decision is generally based on the parties’ intention at the time of the transactions, and it is influenced by the following elements as described in the Happy Valley Farms case:

  • Transaction frequency: The volume of trades made.
  • Time spent holding: The amount of time spent holding bitcoins before selling them.
  • Securities’ nature and amount: The kind and number of cryptocurrencies used in the trading activity.
  • Intention to purchase securities for profit: Whether the individual’s goal was to purchase and resell cryptocurrencies in order to turn a profit.
  • Time invested on the activity: The time allotted to trading cryptocurrencies.

There are normally two possible classifications for mining cryptocurrencies: personal hobby and commercial activity. According to case law, an activity must comply to accepted standards of businesslike behavior and the taxpayer’s primary goal must be to create a profit in order for it to be classified as a business. If the personal components of the activity dominate the commercial components, it is typically categorized as a hobby rather than a business.

Pro Tax Advice: How to get ready for a cryptocurrency tax audit

To ensure you have accurate information about your activities, a trader or investor in cryptocurrency should keep records of all purchases, sales, and mining. When conducting a cryptocurrency tax audit, the CRA will have the whims of any taxpayer who does not maintain accurate financial cryptocurrency records. Consequently, a taxpayer should typically keep the records of the following cryptocurrency transactions, without being limited to them:

  • Observe the specifics of the transaction: Each bitcoin transaction, including purchases, sales, and mining operations, should be noted down along with the date. Record the bitcoin addresses involved as well as the distinct transaction IDs for each transaction.
  • Keep your receipts from purchases: Save your receipts from any bitcoin transactions or transfers. The amount, date, and cryptocurrency’s value in Canadian dollars at the time of the transaction should all be listed on these receipts.
  • Details of document transactions: Give a detailed account of each transaction, mentioning the counterparty (and any relevant details, such as their cryptocurrency address), as well as the transaction’s goal. This makes it clearer what your cryptocurrency actions are and what they’re intended to accomplish.
  • Keep track of your wallet and exchange transactions: Keep track of all of your purchasing, selling, and trading activity on cryptocurrency exchanges. Keep track of the addresses and balances of your wallet as well.
  • Keep cost records on file: Observe all accounting and legal expenses connected to your cryptocurrency-related activity. Also, keep track of any software costs you incur specifically for handling your tax obligations.

It is crucial for miners to keep thorough records in order to make sure proper preparedness for a cryptocurrency tax audit. Cryptocurrency miners also should preserve the following precise records:

  • Receipts for Mining Hardware: As proof of your investment in the machinery, keep the receipts from any purchases you make of mining hardware for cryptocurrencies.
  • Documentation of Expenses: Save all receipts and supporting materials for any costs related to your mining business. Costs for electricity, internet access, mining software, upkeep, and repairs are included.
  • Mining Pool Agreements and Records: Keep copies of all mining pool agreements, as well as any documents or agreements pertaining to the distribution of mining rewards.
  • Record of Mining Activities: Keep any additional records that are pertinent to your mining operations, including as mining logs, hashrate information, and information on the currencies you have mined.
  • Disposition of Mined Cryptocurrency: Keep track of every transactions in which you dispose of cryptocurrency that you have acquired through mining. Dates, sums, costs associated with transactions, and fair market value of the coins at the time of disposal are all included.

But a taxpayer is not compelled to respond to every query a CRA crypto tax auditor puts to them. In MNR v. Cameco Corporation, 2019 FCA 67, the Federal Court of Appeal upheld the lower court’s ruling that the CRA lacked the authority to compel a taxpayer to provide information during the tax audit stage. However, a taxpayer must be aware that the CRA may reach an unfavorable conclusion and suggest additional fines if they decide not to provide information during a bitcoin tax audit. It is never advisable for a taxpayer to communicate with the CRA directly, and it is strongly advised that they contact a knowledgeable Canadian crypto tax lawyer to help them prepare their answers to the CRA’s audit questionnaires and communicate with the agency. If an accountant is required, a Canadian tax lawyer may then appoint the accountant on the taxpayer’s behalf and extend the solicitor-client privilege.

FAQ:

Frequently Asked Question:

Question: Is it required for a taxpayer to respond to all of the auditor’s inquiries regarding crypto taxes?

Answer: At the initial tax audit stage, the CRA is not permitted to demand that taxpayers provide answers. But if a taxpayer declines to respond to specific audit inquiries, the CRA may infer something adverse and suggest additional fines. Thus, keeping accurate financial records and contacting a knowledgeable Canadian cryptocurrency tax lawyer to help you with the process are the best ways to get ready for a bitcoin tax audit.

Question: What does the voluntary disclosure program entail? How does it help the taxpayer?

Answer: For taxpayers who filed prior tax returns with errors or who neglected to disclose their income, a voluntary disclosure application is designed to help them admit to their errors and make the necessary corrections. For the voluntary disclosure program to be available to a taxpayer, they must fulfill the five requirements. If accepted, there are some circumstances where the taxpayer may be free from fines and obtain some interest relief.

Question: I’m currently the target of a crypto tax audit. What are the potential results?

Answer: Tax assessments or reassessments with higher tax burdens may result from a crypto tax audit. When the CRA suspects someone has made or assisted in creating a false statement or omission in a return, whether intentionally or due to circumstances that constitute gross negligence, they nearly invariably levy a gross negligence penalty with a 50% additional tax. A criminal inquiry that could result in a tax prosecution for tax evasion will likely be launched by the CRA if it determines that a taxpayer has engaged in it by fabricating records and claims.

Disclaimer:

“This article contains generic information that may or may not be up to date because it was not recently updated. As a result, it may no longer be applicable or useful. This post does not give legal advice and should not be construed as such. Each tax situation is unique, and the precise facts of your case may differ from those presented in this article. If you have specific legal problems or concerns, it is recommended that you consult with a knowledgeable lawyer for tailored guidance”.

Author

Find the right Legal Expert for your business

The premier guide to leading legal professionals throughout the world

Specialism
Country
Practice Area
LAWYERS RECOGNIZED
0
EVALUATIONS OF LAWYERS BY THEIR PEERS
0 m+
PRACTICE AREAS
0
COUNTRIES AROUND THE WORLD
0

Join

who are already getting the benefits
0

Sign up for the latest advisor briefings and news within Global Advisory Experts’ community, as well as a whole host of features, editorial and conference updates direct to your email inbox.

Naturally you can unsubscribe at any time.

Online Casino Reviews

  • Freeroll Poker Tournaments For Real Money
  • Australian Online Casino Real Money
  • Best Slot App To Win Real Money
  • Online Casino Real Money Australia
  • Best Paying Online Pokies
  • Wizard Of Oz Online Slots
  • All Slots Casino Mobile
  • Best Online Poker App Real Money
  • Best Online Casino To Play Roulette
  • Is Online Casino Legal
  • Online Casino That Accepts Paypal
  • Play Roulette For Real Money
  • Slot Apps To Win Real Money
  • Real Money Slots Online Usa
  • Safe Online Casino
  • Wizard Of Oz Slots
  • Real Online Pokies Nz
  • Biggest Online Casino In The World
  • Online Casino Pay With Paypal
  • Online Casino That Accept Paypal
  • Online Casino Canada Real Money
  • 3 Card Poker Online Real Money
  • Online Slots Real Money Canada
  • Best Online Poker Sites For Real Money
  • Real Money Poker App Android Usa
  • How To Make Money From Online Casino Bonuses
  • Real Money Poker App Iphone
  • How To Play Blackjack Online For Real Money
  • Best Slots To Play
  • Top 10 Online Pokies
  • Best Poker Apps Real Money
  • Online Casino Legal
  • Best Payout Online Casino Uk
  • Win Money Online Slots
  • Online Poker Nj Real Money
  • How To Win Online Slots
  • Casino Gaming License
  • Play Real Pokies Online
  • Blackjack Sites For Real Money
  • Real Money Casino Games For Android
  • Best New Online Slots
  • Flaming 777 Slots Games
  • Online Blackjack With Live Dealers
  • How To Play Online Slots
  • Facebook Casino Games Real Money
  • Online Casino With No Minimum Deposit
  • How To Beat Online Slots
  • Online Casino License
  • The Big Payback Slots
  • Royal Vegas Online Casino Withdrawal
  • Online Casino Minimum Deposit 5
  • Online Pokies Real Money Australia
  • Las Vegas Usa Online Casino
  • Real Money Poker App Android
  • Wheel Of Fortune Slots
  • Game Of Thrones Slots
  • Online Poker Real Money Usa Legal
  • Best Online Casino European Roulette
  • Blackjack Online Real Money Paypal
  • Online Video Poker Real Money Usa
  • How To Create An Online Casino
  • Lucky Nugget Online Casino Mobile
  • How To Withdraw Money From Online Casino
  • Platinum Play Online Casino Download
  • Online Casino For Usa Players
  • Best Online Casino Usa Real Money
  • Online Roulette Real Money Usa
  • Best Real Money Poker Sites
  • Android Slots Real Money
  • How To Start An Online Casino Business
  • How To Start An Online Casino
  • How To Start An Online Gambling Site
  • Best Online Casino For Blackjack
  • Play Baccarat Online For Money
  • Online Pokies New Zealand
  • Best Slots To Play At Golden Nugget
  • Slots Of Vegas Online Casino
  • Best Online Pokies Site
  • How To Beat Online Roulette
  • New Zealand Online Pokies
  • Online Poker Mobile Real Money
  • Which Online Slots Payout The Most
  • Is Online Casino Legal In India
  • Online Casino Software For Sale
  • Best Online Casino For Craps
  • Hard Rock Casino Slots
  • Win Real Money Online Pokies
  • Online Casino With Highest Payout Percentage
  • Poker Apps With Real Money
  • Online Roulette Real Money Review
  • Full Tilt Poker Real Money
  • Online Casino 5 Dollar Minimum Deposit
  • Online Roulette With Real Money
  • Best Online Roulette For Real Money
  • I Migliori Casino Online Italiani
  • Best Payout Online Slots
  • How To Play Baccarat Online
  • Play Casino Card Game Online
  • Play Blackjack Online For Real Money
  • Best Paying Online Slots
  • Casino License Cost
  • Online Poker Real Money California
  • Safe Online Casino Australia
  • Online Roulette Australia Real Money
  • Online Poker Real Money Texas
  • Online Roulette Real Money Paypal
  • Online Slots Australia Real Money
  • Golden Nugget Online Casino Review
  • Casino Games To Win Real Money
  • Online Pokies Australia Real Money
  • Online Gambling Blackjack Real Money
  • Win Real Money Playing Slots
  • How To Win Roulette Online
  • Aristocrat Pokies Online Real Money
  • Hollywood Casino Online Slots
  • Play Online Keno For Real Money
  • What's The Best Online Casino
  • Triple Double Diamond Slots
  • Play Roulette Online With Real Money
  • Roulette Online For Real Money
  • Play Roulette Online Real Money
  • Best Online Pokies Real Money
  • Big Red Pokies Online
  • How To Win At Online Blackjack
  • What Is The Best Online Roulette Site
  • Real Money Online Pokies
  • Spin To Win Slots
  • Ruby Slots Online Casino
  • Wheel Of Fortune Online Casino
  • Spin Palace Flash Casino Online
  • Online Poker Real Money App
  • Online Casino With Paypal Deposit
  • How To Win At Online Roulette
  • Can You Win Real Money On Slot Apps
  • Is Ignition Casino Safe
  • Online Casino Blackjack Real Money
  • Online Casino Win Real Money Usa
  • How To Make Money Online Casino
  • Online Casino Real Money Reviews
  • Slot Games To Win Real Money
  • Jackpot City Online Casino Download
  • Online Pokies Real Money
  • Casino War Online Real Money
  • Online Casino No Minimum Deposit
  • Play Wheel Of Fortune Slots Online
  • Best Online Casino Game To Win Money
  • Online Casino Without Wagering Requirements
  • Online Slots For Real Money Usa
  • Legal Online Casino Australia
  • How Do Online Slots Work
  • Best Online Casino For Us Players
  • Online Play Casino Roulette Game
  • Online Blackjack Real Money Australia
  • Real Casino Games Real Money Online
  • Online Slot Machines Real Money Paypal
  • The Best Online Casino For Roulette
  • What Online Casino Pays Out The Most
  • Start Your Own Online Casino
  • Legal Online Casino
  • Online Live Roulette Casino Game
  • Playing Blackjack Online For Real Money
  • Online Penny Slots Real Money
  • Best Online Blackjack For Money
  • How To Win Online Roulette
  • Real Money Poker Sites Usa
  • Best Time To Play Slots
  • Online Keno For Real Money
  • Best Payout Online Slots Uk
  • Online Slots Real Money Reviews
  • Best Online Pokies Nz
  • What States Allow Online Gambling
  • Best Real Money Poker App
  • Online Slots To Win Real Money
  • Real Money Slots App Iphone
  • Jackpot City Flash Casino Online
  • Ignition Casino Legit
  • All Star Slots Casino
  • How To Play Online Casino
  • Real Time Gaming Slots
  • Online Video Poker Real Money
  • How To Play Roulette Online For Money
  • How To Win On Online Slots
  • Age Of Gods Slots
  • Online Real Casino Money Games
  • Best Online Slots To Play
  • Online Poker California Real Money
  • Is Jackpot City Casino Legit
  • How To Win At Online Slots
  • Play Poker For Real Money
  • Safe Online Pokies Australia
  • Best Way To Play Slots
  • How To Play Casino Online
  • Play Online Roulette For Money
  • Online Casino Australia Real Money
  • Which States Allow Online Gambling
  • Play Keno Online Real Money
  • How To Win Online Blackjack
  • Online Blackjack With Real Dealers
  • How To Open Online Casino
  • What Are The Best Online Slots To Play
  • Big Win Casino Slots
  • Spin Palace Online Casino Australia
  • Best Slots To Win On
  • Casino Slots Win Real Money
  • Slots Magic Online Casino
  • Blackjack Online For Real Money
  • Slot Machine App Win Real Money
  • Online Casino Not Paying Out
  • Slots That Pay Out Real Money
  • Online Pokies Australia Reviews
  • Online Casino Minimum Deposit 1
  • Jackpot City Online Casino Review
  • Live Dealer Baccarat Online Casino
  • Online Casino Apps For Android
  • Online Casino Paypal Deposit Australia
  • Online Casino With Live Dealer
  • How To Play Blackjack Online
  • Slots To Win Real Money
  • Wheel Of Fortune Online Slots
  • Play Quick Hit Slots Online
  • Can You Count Cards In Online Blackjack
  • Palace Of Chance Online Casino
  • How To Play Roulette Online
  • Good Slots To Play
  • Which Online Casino Pays Out The Most
  • Heart Of Vegas Casino Slots
  • Best Online Casino For Canadians
  • Australian Online Pokies Real Money
  • Mohegan Sun Online Casino Nj
  • Online Casino Live Games Best Uk
  • Best Online Casino Australia Reviews
  • Play Pokies Online Real Money
  • Best Online Casino For Usa Players
  • How To Win Online Casino
  • Play Blackjack For Real Money
  • Best Slots On Bovada
  • Online Keno Real Money Usa
  • Online Slots Real Money Paypal
  • Best Poker Sites For Real Money
  • Safe Casino Sites
  • The Best Online Slots
  • Play Keno For Real Money
  • Real Online Pokies Australia
  • Queen Of The Nile Slots
  • Mummys Gold Casino Online Casino
  • Play Keno Online For Real Money
  • Best Poker Websites Real Money
  • Lucky Nugget Online Casino Download
  • Best Online Casino For Roulette
  • Play Roulette For Money Online
  • Video Slots Mobile Casino
  • Best Time To Play Online Slots
  • Best Real Money Online Poker
  • Play Blackjack Online With Friends
  • Play Baccarat Online For Real Money
  • Is Silver Oak Casino Legit
  • Big Fish Casino Real Money
  • Can You Win Real Money On Caesars Slots
  • Game Of Thrones Slots Casino
  • Best Online Slots Payout Percentage
  • Play Online Pokies For Real Money
  • Play Pokies Online Australia
  • High 5 Casino Real Slots
  • The Best Online Pokies
  • Online Pokies That Accept Paypal
  • Heart Of Vegas Slots
  • How To Play Online Roulette
  • Best Poker App Real Money
  • Best Online Casino Fast Payout
  • Best Slots At Wind Creek Casino
  • Online Casino 10 Minimum Deposit
  • Play Roulette Online For Money
  • Us Real Money Poker Sites
  • How To Win In Online Casino
  • Best Online Pokies Australia Review
  • Where To Play Roulette Online For Real Money
  • How To Beat Online Casino Slot Machines
  • Highest Payout Online Slots
  • Best Paying Online Casino Slots
  • Golden Tiger Online Casino Review
  • Online Casino With Live Dealers
  • Play Roulette Online For Real Money
  • Best Slots To Play At Casino
  • Slot Machine Games Win Real Money
  • Most Popular Online Casino Games
  • Casino Slots App Real Money
  • Online Casino Real Money Canada
  • Online Real Money Pokies
  • Online Roulette Game Real Money
  • Online Casino Roulette Real Money
  • Best Place To Play Roulette Online
  • Online Casino Book Of Ra Paypal
  • Online Blackjack With Real Money
  • Play Online Blackjack For Real Money
  • Is There A Slot Machine App For Real Money
  • Royal Vegas Online Casino App
  • Best Casino Slots To Play
  • Most Popular Online Slots
  • Best Way To Win At Slots
  • Slots You Can Win Real Money
  • Play Roulette Online Real Money Usa
  • Online Casino Real Money Paypal
  • Online Casino Australia Legal
  • Treasures Of Troy Slots
  • Online Casino For Us Players
  • Where Can I Play Blackjack Online For Real Money
  • Online Casino Paypal Book Of Ra
  • Online Roulette For Real Money
  • Best Online Blackjack Real Money
  • Poker App For Real Money
  • Jackpot Magic Slots Facebook
  • Best Online Casino Real Money Usa
  • Best Online Casino New Zealand
  • The Four Kings Casino And Slots
  • How To Play Slots Online
  • Best Online Pokies Australia
  • Usa Online Slots Real Money
  • Real Money Casino Android App
  • Online Slot Machines That Pay Real Money
  • Online Pokies Real Money Nz
  • Online Pokies Real Money App
  • Play Igt Slots Online
  • Best Casino Slots To Win Money
  • Online Casino Business For Sale
  • Play N Go Slots
  • Poker Apps For Real Money
  • Lucky Slots Real Money
  • All Slots Online Casino
  • Best Online Pokies Real Money Australia
  • Online Pokies Win Real Money
  • Best Online Casinos For Roulette
  • Pay Slots For Real Money
  • Best Online Poker Real Money
  • Slots App Win Real Money
  • Play Online Roulette For Real Money
  • Is Ignition Casino Legit
  • Wheel Of Fortune Slots Online
  • Lotsa Slots Real Money
  • Video Poker Online Real Money
  • Online Slots Usa Real Money
  • Play Blackjack Online Real Money
  • Jackpot City Online Pokies
  • Video Slots Online Casino
  • Is 888 Casino Legit
  • Online Slot Games That Pay Real Money
  • Prepaid Visa Card Online Casino
  • How To Stop Online Gambling
  • Best Slots To Play Online
  • Online Blackjack For Real Money
  • Slot Apps For Real Money
  • Mobile Slots Win Real Money
  • Newsletter Sign Up

    About Us

    Global Advisory Experts is dedicated to providing exceptional advisory services to clients around the world. With a vast network of highly skilled and experienced advisors, we are committed to delivering innovative and tailored solutions to meet the diverse needs of our clients in various jurisdictions.

    Contact Us

    Stay Informed

    Join Mailing List

    GAE