Pro Tax Tips: Legal Opinion on Proper Tax Reporting of Axie Infinity Income & Voluntary Disclosures Program for Unreported Income from Cryptocurrency-Based, Play-for-Pay Gaming

Canadian taxpayers who generate income by playing cryptocurrency-based, play-for-pay games like Axie Infinity will typically benefit from a tax memorandum examining whether their earnings constitute a source of income and, if so, whether those earnings should be reported as investment income, as business income, as capital gains, or as a blend of all three. The novelty of NFT-based, play-for-pay games means that participating Canadian taxpayers will require competent and expert Canadian tax guidance on several unsettled issues. For example, if the tax cost of your aggregate holdings in SLP tokens and NFT-based Axies exceeds $100,000, you might be required to file a T1135 form. Moreover, while this article focuses on Canadian income-tax issues, you should be aware that NFT transactions—like trading Axies—might give rise to GST/HST obligations. Fungible cryptocurrency, like Bitcoin, Ethereum, or Chainlink, arguably meets the definition of “money” in Canada’s Excise Tax Act. Yet non-fungible tokens don’t readily meet that definition. So, while a cryptocurrency-trading business might constitute a supply of financial services, which is exempt from GST/HST, an NFT-trading business might qualify as a taxable supply. If so, and if an NFT-trading business generates over $30,000 in annual revenue, the business must register for a GST/HST number, charge GST/HST on sales, collect GST/HST from clients, and remit that GST/HST to the Canada Revenue Agency.

If you’ve generated profits by playing Axie Infinity or any other blockchain-based, play-for-pay game, consult a top Canadian tax lawyer for advice. Our experienced Certified Specialist in Taxation Canadian tax lawyer has assisted numerous clients with issues concerning the proper characterization and reporting of cryptocurrency transactions, NFT transactions, and other blockchain-based transactions.
The advances and cooperative efforts of international tax authorities signal the end of the anonymity that cryptocurrency users thought they once enjoyed. This should definitely concern Canadian taxpayers with unreported profits from cryptocurrency transactions. And while blockchain non-fungible tokens are relatively novel, taxpayers engaging in any blockchain-based transactions, such as those involving NFTs, should be equally concerned. If you filed Canadian tax returns that omitted or underreported your cryptocurrency profits or your profits from non-fungible tokens, you risk facing not only civil monetary penalties, such as gross-negligence penalties, but also criminal liability for tax evasion. And if you failed to file T1135 forms for your NFT holdings, the standard late-filing penalty can be upwards of $2,500.00 per unfiled form, and the gross-negligence penalty can be upwards of $12,000.00 per unfiled form.
You may qualify for relief under the CRA’s Voluntary Disclosures Program. If your VDP application qualifies, the CRA will renounce criminal prosecution and waive gross-negligence penalties (and may reduce interest). But your voluntary-disclosure application is time-sensitive. The CRA’s Voluntary Disclosures Program will reject an application—therefore denying any relief—unless the application is “voluntary.” This essentially means that the Voluntary Disclosures Program must receive your voluntary-disclosure application before the Canada Revenue Agency contacts you about the non-compliance you seek to disclose.

Our expert Certified Specialist in Taxation Canadian tax lawyer has assisted numerous Canadian taxpayers with unreported cryptocurrency and blockchain transactions. We can carefully plan and promptly prepare your voluntary-disclosure application. A properly prepared disclosure application not only increases the odds that the CRA will grant tax amnesty but also lays the groundwork for a judicial-review application to the Federal Court should the Canada Revenue Agency unfairly deny your voluntary-disclosure application.  To determine whether you qualify for the Canada Revenue Agency’s Voluntary Disclosures Program, schedule a confidential and privileged consultation with one of our expert Canadian tax lawyers.