Pro Tax Tips: Legal Tax Analysis of Proper Cryptocurrency Tax Reporting & Voluntary Disclosures Program for Unreported Income from Cryptocurrency Transactions

Canadian taxpayers who trade cryptocurrency, who invest in cryptocurrency, or who’ve received cryptocurrency by airdrop 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 business income, as capital gains, or as a blend of the two. The distinctiveness of cryptocurrency airdrops means that Canadian taxpayers who’ve received airdrops will require competent and expert Canadian tax guidance on several unsettled issues. Our experienced Certified Specialist in Taxation Canadian crypto tax lawyer has assisted numerous clients with issues concerning the proper characterization and reporting of their cryptocurrency transactions and other blockchain-based transactions. We can also provide advice about record-keeping to ensure that the Canada Revenue Agency doesn’t fault you for misrepresenting the information in your tax returns and charge you with gross-negligence penalties—or, even worse, prosecute you for tax evasion.

The advances and cooperative efforts of international tax authorities signal the end of the anonymity that cryptocurrency users believed that they’d once enjoyed. This should trouble Canadian taxpayers with unreported profits from cryptocurrency transactions. If you filed Canadian tax returns that omitted or underreported your cryptocurrency profits, you risk facing not only civil monetary penalties, like gross-negligence penalties, but also criminal liability for tax evasion.  And if you failed to file T1135 forms for your cryptocurrency holdings, your non-fungible token holdings, or your holdings in other blockchain-based assets, the standard late-filing penalty can be upwards of $2,500 per unfiled form, and the T1135 gross-negligence penalty can be upwards of $12,000 per unfiled form.

You may qualify for relief under the CRA’s Voluntary Disclosures Program (VDP). If your VDP application qualifies, the Canada Revenue Agency will abandon criminal prosecution and waive gross-negligence penalties (and may cancel or waive interest). A VDP 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 VDP application before the Canada Revenue Agency contacts you about any of the non-compliance you seek to disclose.

For more information about qualifying for relief under the VDP, see our article on the CRA Voluntary Disclosures Program.

Our expert Canadian tax lawyers have assisted numerous Canadian taxpayers with unreported cryptocurrency profits and blockchain transactions. We can carefully plan and promptly prepare your VDP application. A properly prepared voluntary-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 VDP 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 knowledgeable Canadian tax lawyers. The Canada Revenue Agency cannot compel the production of information protected by solicitor-client privilege. Solicitor-client privilege prevents the CRA from learning about the confidential legal advice that you receive from your tax lawyer. No such privilege exists for accountants, so your communications with an accountant remain unprotected. As a result, if you seek tax advice but want to keep that information away from the Canada Revenue, you should first approach our Canadian tax lawyers. If you require an accountant, we can retain the accountant on your behalf and extend our solicitor-client privilege.