After watching the frenzied consumer trading of GameStop shares earlier this year with rapt interest, Taraleigh Wallace decided it was time to buy cryptocurrency.
“Those meme stocks were going crazy,” said the hair stylist, who lives in Stratford, Ont. It only made sense to her that meme-famous Dogecoin would be next.
In February, she bought about $900 of Dogecoin, ethereum, bitcoin and some less popular coins she’s since abandoned. Within a couple of months, her investment was worth $2,300 – largely on the success of Dogecoin, which spiked from 3 US cents a coin on Feb. 1 to 39 US cents by April 19.
Ms. Wallace, 46, says she converted the amount of her initial investment back into Canadian dollars and is leaving the rest invested in crypto to see what happens. “You only put in what you can lose,” she says, noting she’s saving what’s still invested as a potential nest egg for her preschool-age daughter.
Ms. Wallace says she hasn’t given much thought to the tax repercussions of her relatively minor crypto purchase, saying she assumed it would only be taxable if she pulled it out of the exchange she uses for trading.
That’s a common misunderstanding, says chartered professional accountant Mehran Sedigh, who says any trade is a taxable transaction, and traders can be fined if the Canada Revenue Agency discovers a taxpayer’s crypto earnings before they are reported voluntarily.
Mr. Sedigh – a partner in Toronto-based Triple M Professional Corp., which specializes in accounting for cryptocurrency buyers – says he’s seen a huge influx in people seeking his services since the start of the pandemic.
“It’s becoming mainstream, but a lot of people are clueless about their tax consequences,” he said, adding, “a lot of tax firms aren’t even touching it.”
CRA spokesperson Chantal Beaudry says her organization “does not currently track cryptocurrency declarations separately” so can’t say how many Canadians are reporting it on their taxes. She declined to share information on fines levied, citing privacy reasons.
Mr. Sedigh says all crypto traders in Canada should know the following tax facts, even if their holdings are minimal.
Cryptocurrency trading is traceable by CRA
Mr. Sedigh points out that a ledger of wallet addresses is available to the public through blockchain technology. “If the tax authorities can tie wallet addresses to individuals or businesses, all transactions are documented. Additionally, there have been recent court orders in which crypto exchanges had to turn over all of their clients’ trading history to tax authorities, making transactions traceable and trackable.”
All crypto transactions are taxable events
A taxable event is triggered each time a crypto-to-crypto transaction happens, says Mr. Sedigh, which means gains and losses need to be calculated. He recommends converting each trade to Canadian dollars when it occurs and logging those numbers. “Reports should be drawn on a monthly basis as some trading platforms have been known to lose data or shut down,” he adds.
Some profits are capital gains, some are business income
Traders who realize capital gains only pay tax on half the profits, while those earning business income pay tax on the full amount, Mr. Sedigh says. The way CRA determines whether someone’s crypto trading is a business isn’t an exact science. It depends on factors including how speculative the trades are, if trading occurred on borrowed funds, the trader’s level of expertise, how long the position was held and the number of trades per month, he says.
CRA’s Ms. Beaudry says that if the trader “carries on the activity for commercial reasons and in a commercially viable way; undertakes activities in a businesslike manner, which might include preparing a business plan and acquiring capital assets or inventory; promotes a product or service; or shows that they intend to make a profit,” their profits could be considered business income.
You can claim your losses
Mr. Sedigh says traders who lose money on crypto can claim their losses in the tax year they occurred, applying them to their income to get a tax break. But, he cautions, “if you’re claiming losses, you’re more likely to be audited.” Definitely claim them, just keep clear records, he says.
You can’t leave the country to avoid tax
There is an exit tax for people severing residential ties to Canada and “all realized and unrealized gains to be reported for digital and crypto assets,” says Mr. Sedigh. “That’s with all assets you own other than real estate.”
For traders who started before this year and see themselves in the scenarios above, Mr. Sedigh recommends taking advantage of CRA’s voluntary disclosure option, which allows taxpayers to correct the record on past years’ filings. In such cases, any outstanding tax and interest must still be paid, Ms. Beaudry says, but “taxpayers would be eligible for relief from prosecution and, in some cases, from penalties.”
False statements and omissions will cost a taxpayer $100 or 50 per cent of the amount omitted, whichever is greater, according to the CRA’s website.
Mr. Sedigh says clients of his who disclosed past years’ crypto earnings before being audited saw “100 per cent success” in avoiding such penalties.
“You pay the tax and sometimes the interest, but the penalty is the one that ends up being a high figure if they get to you before you get to them.”
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