The tax laws and reporting requirements for cryptocurrency are essential to understand. CRA and IRS, in 2018, introduced a joint effort to identify cryptocurrency users who evaded their tax obligations. They have developed strategies together, as well as other tax authorities. Tax auditors or prosecutors can use this information to identify cryptocurrency users for tax audits or prosecutions. The Canadian Revenue Agency (CRA) surprised several crypto users by sending them a 13-page questionnaire in 2019. On the questionnaire, they were asked about their cryptocurrency activity. Digital currency exchange has enabled the IRS to gain access to its users’ accounts in the United States. It openly asks taxpayers to disclose earnings in virtual currency on their 2020 individual income tax returns. Several tax authorities have increased their efforts to prosecute those who use cryptocurrencies to evade taxes.
CRA and J5 (The Joint Chiefs of Global Tax Enforcement)
In 2018, the Joint Chiefs of Global Tax Enforcement (J5) was established to investigate tax evasion and money laundering involving cryptocurrency. CRA joined the Joint Chiefs of Global Tax Enforcement (J5) on July 3rd, 2018. The United Kingdom, Australia, the Netherlands, and the United States of America are also members of the Joint Chiefs of Global Tax Enforcement (J5). J5 analyzed data involving taxpayers in Canada, Australia, the Netherlands, the United Kingdom, and the United States to gather information about cryptocurrency transactions.
In its mandate, the J5 pays close attention to information exchange and joint investigations that focus on cryptocurrency’s challenges for tax administrators in its member countries. Among the assets and income, the J5 will find Bitcoin SV (BSV), Binance Coin (BNB), and Facebook’s Libra (LIBRA).
The Cryptocurrency Tax-Audit Questionnaire for Canadians
In most tax audits, the CRA sends a letter informing the taxpayer of the impending audit, the tax years or reporting periods under audit, and the general scope of the audit. Initial questionnaires are often included in these letters. Taxpayers in Canada receive a 13-page cryptocurrency audit questionnaire from the CRA if they are selected for a cryptocurrency tax audit. Among the topics discussed are the following:
- When you become a cryptocurrency owner or user;
- Source of cryptocurrency purchases;
- Exchange wallets provided by third parties;
- How the cryptocurrency was purchased;
- Maintaining records of transactions by the taxpayer;
- ICO participation;
- Any cryptocurrency holdings (e.g., Node, Masternode, Supernode, etc.) that generate passive income for the taxpayer;
- Mining of cryptocurrencies (including questions about the type of mining hardware used and the associated energy costs);
- Payments for goods or services with cryptocurrency;
- Transactions involving cryptocurrency; and
- Studying cryptocurrencies.
- The CRA or tax auditor may request bank-account statements or other records to verify the taxpayer’s answers.
What Records Should You Keep In Case of an Audit by CRA
Cryptocurrency users should regularly export their transaction information to avoid losing it. Cryptocurrency users should be maintained the following records about their cryptocurrency transactions:
- The date of each transaction;
- Receipts of any cryptocurrency purchase or transfer;
- Its cost in Canadian dollars at the time the transaction took place;
- Records of digital wallets and addresses of cryptocurrencies;
- This should include information about the transaction and the other party (e.g., their cryptocurrency address);
- Records of exchange;
- Costs incurred for accounting and legal services; and
- Documents about the costs of software used to manage your tax affairs.
If you mine cryptocurrency, you should also keep the following records:
- Invoices for cryptocurrency mining hardware
- Your invoices for cryptocurrency mining costs (e.g., electricity, mining pool fees, maintenance costs)
- Details on how you mine cryptocurrencies (e.g., machine specifications, operating times); and
- Details and records of a mining pool.
There are Canadian tax specialists who specialize in the proper record-keeping and accounting for cryptocurrency profits. The CRA won’t be able to accuse you of misrepresenting your tax information this way. For more information, contact us, and we will be happy to help.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.