The surge in cryptocurrency investments has led to significant profits for many Canadians. However, with the Canada Revenue Agency (CRA) tightening its grip on digital assets, failure to report crypto income can lead to severe penalties, audits, and even legal repercussions. If you have unreported crypto income, you must take corrective action before the CRA discovers the discrepancy. Fortunately, there are ways to rectify past mistakes while minimizing financial and legal consequences.
Understanding CRA’s Stance on Cryptocurrency
Crypto transactions—including trading, mining, staking, and even receiving digital assets as payment—are taxable events. Gains can be classified as capital gains or business income, which are reported and taxed differently. In Canada, however, a single transaction by a hobbyist can be perceived by the CRA as a business activity, which requires the taxpayer to report their gains as business income, not a capital gain. Further, businesses are required to report purchases, gains, and dispositions differently depending on the type of business they operate and the services they provide – resulting in different tax implications.
These reporting obligations are assessed on a case-by-case basis, requiring a legal interpretation of the tax laws in the context of your circumstances and the nature of your transactions. In other words, you need legal advice for crypto taxes from an experienced Canadian crypto tax lawyer before filing your returns.
The Consequences of Unreported Crypto Income
The CRA actively monitors cryptocurrency transactions and has mechanisms to track undeclared income. Through collaborations with exchanges, blockchain analytics, and financial institutions, the agency can identify discrepancies between reported income and actual transactions. The penalties for unreported crypto earnings can include:
• Interest charges on unpaid taxes
• Fines for non-compliance
• Reassessment of past tax returns
• Criminal charges in severe cases
The longer you wait to address unreported crypto income, the greater the risks. Voluntarily correcting errors before the CRA initiates an audit can significantly reduce penalties and potential legal consequences.
Steps to Fix Unreported Crypto Income
If you have unreported crypto income, here’s how you can address the issue:
1. Gather and Organize Your Records
Start by compiling a comprehensive record of all your cryptocurrency transactions. This includes:
• Trades on exchanges
• Mining and staking rewards
• Airdrops and forks
• Crypto received as payment for goods or services
• Transfers between wallets (to confirm they were non-taxable events)
Ensure you have accurate documentation, such as exchange statements, wallet logs, and transaction records, to determine your taxable income.
2. Determine Your Tax Obligations
Once you have a clear record of your transactions, consult a Canadian crypto tax lawyer to understand your reporting obligations and calculate your gains or losses. In Canada, crypto transactions are generally subject to either capital gains tax (where only 50% of the gain is taxable) or business income tax (where the entire profit is taxable).
3. File Adjusted Tax Returns
The CRA allows taxpayers to correct past errors by filing an amended tax return. If you’ve only missed reporting crypto income for a single year, you may be able to submit a reassessment request through your CRA My Account. However, if the issue spans multiple years, or if the omissions are significant, you need to take a different approach.
4. Consider the Voluntary Disclosures Program (VDP)
The CRA’s Voluntary Disclosures Program (VDP) is designed for taxpayers to fix errors on previous returns or who haven’t filed returns for previous tax years. By proactively coming forward through this program, you may:
• Avoid criminal prosecution
• Reduce or eliminate penalties
• Potentially receive relief from some interest charges
To qualify for the VDP, your disclosure must be voluntary, complete, and involve a tax return that is at least one year overdue. Importantly, the CRA will not accept disclosures once an audit or investigation has already begun.
This, again, is another situation that requires the advice of an experienced Canadian crypto tax lawyer. Acceptance to the VDP is not guaranteed, and neither are the decisions to reduce interest, penalties, and forgo prosecution. An expert Canadian crypto tax lawyer will help you file an application that results in the best possible outcome.
5. Pay Outstanding Taxes
Once you’ve determined your tax obligations and filed the necessary adjustments, ensure that you pay any outstanding balances. The CRA charges daily interest on unpaid taxes, so settling the amount as soon as possible can prevent further financial strain.
If you’re unable to pay in full, the CRA may offer payment arrangements to help you manage the debt over time.
How to Stay Compliant Moving Forward
Correcting past mistakes is only part of the solution. To avoid future issues with the CRA, implement these best practices:
1. Maintain Detailed Records
Keeping thorough records of all crypto transactions, including timestamps, market values, and transaction details, will make tax reporting much easier. Various software tools can help automate tracking and reporting.
2. Stay Informed About Tax Regulations
Crypto tax regulations are evolving, and staying updated on new developments can help you remain compliant. Following CRA announcements and seeking professional advice regularly can prevent unintentional violations.
3. Report Crypto Transactions Accurately
Whether you’re buying, selling, staking, or earning cryptocurrency, ensure that you consult a Canadian crypto tax lawyer and that all transactions are correctly reported on your tax return.
Act Before the CRA Comes Knocking
If you have unreported crypto income, waiting for the CRA to discover it is not a viable option. Taking proactive steps to correct past errors can prevent costly penalties and legal issues. Whether you choose to amend previous tax filings or seek relief through the Voluntary Disclosures Program, acting quickly will put you in a far better position.
Cryptocurrency taxation is complex, but it doesn’t have to be overwhelming. With proper guidance and a commitment to compliance, you can ensure that your crypto earnings remain a source of financial growth—not legal trouble.