The growing popularity of cryptocurrencies such as Bitcoin, Ethereum, and others has led to an increased focus by the Canada Revenue Agency (CRA) on ensuring taxpayers comply with their reporting obligations. If you’ve neglected to properly report your crypto earnings on your Canadian tax return, it’s imperative that you take proactive steps to rectify the situation as quickly as possible. Deficient tax returns can result in audits, penalties, or even criminal prosecution.
Understanding Your Obligations
Cryptocurrency transactions, including buying, selling, trading, mining, and staking, have tax implications under Canadian laws. Gains or losses from crypto transactions must be reported as either business income or capital gains. The issue is that individual taxpayers who aren’t operating a business often have their crypto earnings classified as business income by the CRA. Further, taxpayers with crypto returns deemed to be business income have different reporting rules depending on the nature of their activities.
In other words, the best way to truly know your tax obligations and remain compliant is to consult a tax lawyer specializing in crypto taxation law. They’ll provide you with a memorandum detailing your tax obligations based on how Canadian law applies to your situation and help you file unreported crypto taxes using their knowledge and experience to mitigate your risks.
Steps to Address Unreported Crypto Earnings
1. Review Your Cryptocurrency Transactions
Begin by gathering all relevant information about your cryptocurrency transactions. This includes:
- Records of trades and exchanges.
- Details of crypto received as income (e.g., mining, staking rewards, or payment for services).
- Purchase records to establish your adjusted cost base (for capital gains or losses.)
- Receipts of expenses related to your crypto activities (for business income.)
- Records of wallet-to-wallet transfers, which can help clarify the origin and purpose of your holdings.
Using crypto tax software or consulting a tax professional experienced in digital assets can simplify the process of organizing your data.
2. Calculate Your Taxable Income
Once you’ve organized your transaction history, determine the taxable income derived from your crypto activities. If your crypto holdings were sold or exchanged for a profit, the resulting gain or loss must be reported based on the nature of your activities.
3. Correct Past Tax Returns
If you realize that past tax returns were filed with incorrect or incomplete information, you can make corrections using the CRA’s Voluntary Disclosures Program (VDP). This program allows taxpayers to come forward voluntarily to correct errors or omissions on their tax returns. By doing so, you may avoid prosecution and could be eligible for partial relief from penalties.
When applying to the VDP, it’s best to consult a Canadian crypto tax lawyer as they can help you:
- Submit a detailed application that gives you the best chance of acceptance and does not expose you to further liability.
- Include all relevant supporting documentation.
- Ensure your disclosure is complete and accurate.
- Properly apply for taxpayer relief if applicable.
4. File Current Returns Accurately
If your unreported crypto earnings pertain to the current tax year, ensure your tax return is accurate and includes all relevant details.
5. Pay Any Outstanding Taxes and Interest
Once you’ve calculated your liability, make arrangements to pay any outstanding taxes along with applicable interest. The CRA charges interest on unpaid taxes starting from the original due date. Prompt payment demonstrates good faith and can reduce further penalties.
Proactive Steps for the Future
To avoid future issues, consider implementing the following practices:
- Keep detailed records of all crypto transactions.
- Use reliable cryptocurrency tax software to track gains and losses.
- Stay informed about updates to Canadian tax laws related to cryptocurrency.
- Consult a Canadian tax lawyer specializing in cryptocurrency taxation before filing your returns.
By leveraging tools like the CRA’s Voluntary Disclosures Program and seeking professional assistance from a crypto tax lawyer to review your filings, you can ensure compliance and protect your financial future.
