As cryptocurrency continues to move into the mainstream, it’s safe to say that crypto’s wild and crazy days are behind us.
As more money is invested into the market, national tax agencies like the CRA (Canadian Revenue Agency) and IRS (Internal Revenue Service) want their fair share.
But cryptocurrencies are untraceable, right? Can the CRA track cryptocurrency?
The short answer is yes. But that doesn’t mean you owe taxes on ALL your cryptocurrencies.
However, if you’re thinking there are ways to avoid paying the CRA, you might want to think again. The penalty for not paying is pretty hefty, so you might want to reconsider.
Not all cryptocurrencies are taxed the same way in Canada, so check out our guide on paying crypto taxes in Canada to get the information you need.
For the purposes of this article, let’s take a closer look at how the CRA is involved.
While cryptocurrencies are considered digital assets, they are not viewed as legal tender by the CRA. These are digital tokens or coins used in the exchange of goods or services.
However, most crypto transactions are viewed by the CRA as capital gains, which means they’ll be taxed as such.
We’ll talk more about what is and isn’t taxable according to the CRA in a bit. For now, let’s learn how we got to this point.
A few years ago (2020 to be exact), the CRA filed a petition against Coinsquare – a cryptocurrency platform – in Federal Court.
The intention of the application was to compel the company, located in Toronto, to give up the private tax information of its users. Initially, the CRA requested the tax data on all Coinsquare customers.
However, the agency backed off its initial request, changing it to data on customers who deposited more than $20,000 CAD since opening their accounts.
This applied to users all the way back to 2014 and also required Coinsquare to provide data on its top 16,500 customers.
The CRA also asked that it be given a complete list of all customer accounts, along with a detailed list of all deposits and withdrawals.
Additionally, it requested information related to trading transactions, deposit addresses, and any other pertinent information that Coinsquare had available.
These requests were granted in March 2021 by the federal court and are now part of Section 231.2 of the Income Tax Act. This act gives the CRA the power to request customer information in regards to any tax activities that relate to the CRA and its governance.
It means that the CRA can indeed track cryptocurrency. While many crypto investors view this as a negative thing, some regulations can help stabilize and legitimize the market.
Plus, you’re not going to be taxed on holding crypto, but rather on any income you make from transactions related to digital currencies.
Crypto transactions are taxed as either capital gains or incoming based on the circumstances surrounding said transaction.
Along those same lines, any losses are considered capital losses by the CRA, which means you can deduct them from your income. Keep in mind that each separate cryptocurrency is considered a distinct asset and is taxed as such by the CRA.
There are several situations in which you’ll have to pay taxes on your crypto in Canada. These include:
- Selling cryptocurrency
- Exchanging your cryptocurrency (if you make a profit)
- Trading your crypto for fiat currency (CAD, USD, EUR, etc.)
- Using your crypto to purchase goods or services
Until the CRA was able to successfully track user transactions, investors believed they would be able to hide their gains in cryptocurrency.
Nowadays, investors need to be aware that the CRA has their trading history information readily available, which means they’ll have to pay taxes on their gains whether they like it or not.
Trading behavior will largely dictate how the CRA views your transactions. If you’re trading every day, it is likely to view any profits as income, which means your gains are taxed as such.
However, if you don’t buy and sell too often, your income is taxed as capital gains, which means you’ll only pay taxes on half your profits.
As the CRA ramps up its efforts to weed out those who try to avoid paying taxes on their crypto, it might be worthwhile to consider voluntarily disclosing your tax information.
This is done through the CRA’s voluntary disclosure form, which helps mitigate the potential for an audit.
To be eligible for this program, you have to fulfill the following criteria:
- The CRA doesn’t know about what you currently owe in crypto taxes
- You are required to divulge all years in which you did not pay crypto taxes
- You must owe taxes on the years you did not pay
- You must be one year past the due date for your unpaid taxes
If you’re not sure how to complete the necessary documents, you can always enlist the help of a tax professional or use a crypto tracking tool that manages all your transactions. That way you’ll have the necessary information when it’s time to do your taxes.
The last thing you want is for the CRA to discover that you’ve been trying to hide income in the form of cryptocurrencies. If you’re audited and found guilty of tax evasion, you may face some hefty penalties or even jail time.
In Canada, it is illegal to not report your cryptocurrency profits as income. To ensure that the system is fair, the CRA takes an active approach in determining who isn’t paying the taxes they owe. Part of this is partnering with cryptocurrency exchanges, which means the CRA can track your cryptocurrency transactions.
Since many of these platforms gather personal information when creating accounts, the CRA knows exactly who is performing these transactions, how much each transaction is worth, when the transaction occurred, and whether or not it was reported.
It goes without saying that the wise thing to do is report your crypto gains on your taxes.