Understanding CRA Crypto Tax Audits

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Written By Charlotte Miller

The digital currency world is a rapidly evolving space. As with any financial asset, governments have taken an interest in how cryptocurrency integrates into the broader economic landscape, especially when it comes to taxation.

The Canada Revenue Agency (CRA) is keen to ensure that individuals and businesses are accurately reporting their crypto-related earnings, transactions, and holdings. To enforce this, they will conduct a CRA crypto audit on a taxpayer they feel is not accurately reporting income.

 Their aim, especially in the digital economy, is to ensure that taxpayers are correctly declaring and paying taxes on all sources of income, whether that’s salary, investment gains, or profits from buying and selling cryptocurrency.

How Does the CRA View Cryptocurrency?

The CRA does not view cryptocurrency as a form of money; they treat it as a commodity. This means that using or trading cryptocurrencies might result in taxable events. For instance, if you use Bitcoin to buy a laptop and Bitcoin’s value has increased since you first acquired it, there might be a taxable capital gain.

However, if you trade or mine with enough frequency, the CRA may consider revenues as business income that must be reported as such. Failure to comply might result in a CRA crypto tax audit.

What Triggers a CRA Crypto Tax Audit?

The world of cryptocurrencies is diverse, and not all transactions will necessarily be of interest to the CRA. However, certain situations can raise flags:

  1. Large Transactions. Significant crypto transactions, especially when frequently conducted, could pique the interest of the CRA.
  2. Frequent Trading. Day trading or frequently buying and selling various cryptocurrencies can also attract attention.
  3. Discrepancies in Reporting. If there’s a mismatch between your reported income and your lifestyle, or if your reported cryptocurrency gains seem out of step with market movements, it might be cause for further investigation.

How Can I Prepare for a CRA Crypto Audit?

The best way to be prepared for a potential crypto tax audit is to keep comprehensive records. Here’s what you can do:

  1. Track Every Transaction. Whether it’s a purchase, sale, trade, or even using crypto for goods and services, ensure you have a record of it.
  2. Determine Fair Market Value. For every transaction, note the fair market value of the cryptocurrency in Canadian dollars at the time.
  3. Save Additional Information. Receipts, dates, involved parties, and the purpose of each transaction should be documented. There are software tools and apps designed to help with this.
  4. Consult Professionals. If you’ve received notice from the CRA that you are going to be audited, always consult a tax lawyer. In this situation, look for one that specializes in crypto tax matters.

What Happens During a CRA Crypto Tax Audit?

If the CRA selects you for an audit, crypto-tax-related or otherwise, the process is as follows:

  1. Notification. You’ll receive a notification, typically by mail, informing you of the audit and its scope.
  2. Document Submission. The CRA will request specific documents and information. It’s essential to provide what’s asked promptly.
  3. Examination. The CRA will examine the provided information. They might ask additional questions or seek clarification on certain points.
  4. Outcome. Once the audit is complete, you’ll receive an outcome. This could range from no changes needed to additional taxes owed or even refunds in some cases.

In Summary

A CRA crypto audit, much like audits for other types of income or assets, requires the guidance of a licensed professional. The CRA has broad powers to make decisions about your crypto activities and tax reporting and can have devastating financial consequences. A tax lawyer who specializes in crypto tax laws who is on your side can level the playing field, protect your rights, and get you the best possible outcome.