Forbes reports that the Canada Revenue Agency ("CRA") has initiated audits in the cryptocurrency space, sending select taxpayers a lengthy and exacting questionnaire requiring information regarding the taxpayer's investments, cryptocurrency purchases and sales, mining history, assets, wallets, and Initial Coin Offering ("ICO") participation.
The initiative is part of the CRA's underground economy strategy, which describes its general purpose as protecting the integrity of Canada's tax system and limiting the reduction in tax revenues that results from, amount other things, the digital economy.
In a public statement, the CRA commented that in 2017 it developed a dedicated crypotocurrency unit. Unsurprisingly, in this statement, the CRA refused to provide any information on the specific information or criteria they use to select files for audit, though it has confirmed that it currently has over 60 active audit files in the cryptocurrency space.
The questionnaire asks about the history of the taxpayer's involvement in the cryptocurrency space, investments, transactions with specific exchanges such as shapeshift exchange and changelly, use of cryptocurrency mixing services and tumblers, and the reasons for using such services. The questionnaire also inquires into cryptocurrency storage, requiring information about both hot and cold wallets, and requires detailed information on trading activity, the source of funds used in cryptocurrency activities, investments in ICOs, commercial transactions using cryptocurrency and mining activities.
The questionnaire describes itself as an 'initial interview' and alerts taxpayers that there may be follow up questions.
The CRA's cryptocurrency audits follow the example of the Internal Revenue Service, who has been actively auditing the cryptocurrency space for several years and which won a partial victory in late 2017 when the United States District Court Northern District of California ruled that the San Francisco coin exchange Coinbase must supply the IRS with identifying information on all users who had more than $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period.
Despite the underground, 'off the grid' character of cryptocurrency, Canadians who have invested in cryptocurrency, or engaged in the space in any capacity, may have significant tax liabilities.
The CRA takes the position that cryptocurrency is not a form of money, but a type of property. Generally speaking, what this means is that cryptocurrency will be taxed like a commodity such as gold, and taxpayers are required to report all associated gains and losses.
If you have invested in cryptocurrency, if you have engaged in the space as a miner or trader, if you have been paid in cryptocurrency or if you have participated in an ICO, regardless of whether you have gains or losses, we advise contacting a tax professional to discuss your exposure.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.