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Advisors can help clients who maintain DIY accounts by providing templates they can use to track their trades and uses of cryptocurrency.Ratiger/iStockPhoto / Getty Images

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Financial advisors often have clients who dabble in do-it-yourself (DIY) accounts on the side – but do those clients understand the tax implications of their stock and cryptocurrency trading?

A recent Wealthsimple Inc. survey suggests that, more often than not, the answer is no. While most of the survey participants said they felt confident about their taxes, 66 per cent of stock traders and 85 per cent of crypto traders acknowledged they had “little to no knowledge of how to report capital gains on their tax return.”

Not getting this information right can be extremely costly, says Jarrett Holmes, financial planner at Ironshield Financial Planning in Winnipeg.

“The risk of failing to report gains or losses properly could be being assessed interest on taxes that would otherwise have been due, or a 50-per-cent penalty for negligence,” he says. “In the worst-case scenario, if your failure to report is found to be intentional, which could often be the case, especially in the crypto space, then the risk is being charged with tax evasion.”

Mr. Holmes adds that if clients aren’t thinking about taxes in relation to DIY accounts, frequent trading can erode returns by triggering multiple taxable events. There are also missed opportunities for tax planning such as tax-loss harvesting at year-end.

However, he acknowledges that providing tax planning guidance outside the accounts advisors manage can be “a touchy issue.”

“DIY investors are choosing to DIY, and so they’re pretty well assuming the responsibility when it comes to accurate reporting for tax purposes,” he says.

Mr. Holmes focuses on educating clients with DIY accounts, such as outlining how different types of investment income are taxed and explaining what events trigger taxation.

“With cryptocurrency, for example, there are numerous events that can trigger taxes,” Mr. Holmes says. “Obviously, selling and trading, but [also] converting it to a local currency or another currency … as well as using the cryptocurrency to purchase goods.”

Difference between capital gains and business income

A further complication DIY investors face is that the Canada Revenue Agency (CRA) may deem frequent traders to be generating business income rather than capital gains, says Suzanne Mignault, senior financial planner at Assante Capital Management Ltd. in Ottawa.

That makes a significant difference to someone’s tax bill as 100 per cent of business income is taxable compared with 50 per cent of capital gains. The CRA has been cracking down on taxpayers who try to shelter this type of activity inside a registered account such as a tax-free savings account.

“It’s always a grey area. You can bend the line both ways … But if you use the capital gains treatment, you have to be able to justify it,” Ms. Mignault says.

Even if the investor is clearly earning capital gains and not business income, Ms. Mignault notes that the CRA can review returns going back at least three years with no limit in cases of suspected fraud or misrepresentation. If there’s a mismatch between what the investment firm reported and what an investor reported, the investor will hear about it.

“It’s not going to happen a few months after they file a return – it could happen a couple of years after,” she says. “Sometimes [investors] don’t even have the cost base, so it’s the full proceeds that they use as a capital gain.”

Ms. Mignault says it’s better to be prepared because it can be a very frightening and expensive bill.

She also recognizes that DIY investors are often DIY tax filers, but she finds herself recommending regularly that they seek out the professional support of an accountant at tax time.

In addition, she has discovered that the comprehensive tax package she prepares for the accounts she manages can be persuasive because its simplicity sometimes, convinces clients to move their DIY accounts over to her.

“I find people will manage a portion of their money for a while. They’ll play with it and all that. And, after a while, they realize it takes time. [Eventually,] it comes to a point that they will say, ‘You know what? I’ve done it now, and I realize that I’d much rather have you manage everything,’” Ms. Mignault says, adding that it depends on whether this account is just play money or clients want to be more involved in their investments.

Support recordkeeping but leave it to clients

Meanwhile, Stephanie Murray, chief financial officer with CH Financial Ltd. at Investia Financial Services Inc. in Calgary, says a lot of individuals like to feel in control of their investing.

“Do-it-yourself [investors] feel like they can really take charge every single day and react as the market reacts,” she says. “They don’t have to deal with a middle-person, and they might feel they get more value by avoiding certain fees or transaction costs that a lot of managed accounts have.”

Ms. Murray remains firmly in favour of managed accounts, but she says advisors can help clients who maintain DIY accounts by providing templates they can use to track their trades and uses of cryptocurrency, as well as helping them work out what they need to track and where they can find that information.

That said, none of this changes who’s responsible for actually doing the tracking and reporting.

“One of the risks [DIY investors take on] is having the onus on them to keep track of records and transactions throughout the year,” Ms. Murray emphasizes.

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