Crucial for cryptocurrency holders to understand tax impact

By Staff

With the Canada Revenue Agency (CRA) zeroing in on unreported cryptocurrency transactions over the last year, taxpayers who trade these assets should understand how they are viewed by the taxman, says Canadian tax lawyer David J. Rotfleisch.

The CRA, explains Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation, takes the preliminary position that cryptocurrency transactions are similar to commodities.

“Gains on the sale of Bitcoin or other cryptocurrencies are fully taxable in the same way that stock markets or commodity transactions such as gold are,” Rotfleisch tells

“The only question in any particular case is whether any gains are on account of income or are treated as capital gains,” he adds.

The difference brings important tax implications, Rotfleisch says, as the full amount of business or property income is taxable, while only 50 per cent of a capital gain is taxable.

Conversely, says Rotfleisch, while only half of capital losses are deductible, taxpayers can fully deduct losses associated with business or investment activity.

Some cryptocurrency transactions, such as trading and investing, he says, may straddle the line between income and capital.

“A person who mines Bitcoin may be thought of as either acquiring a capital property or earning business income. If thought of as acquiring a capital property, the miner’s adjusted cost base would be the Bitcoin’s fair market value at the time of acquisition,” Rotfleisch says.

In any event, cryptocurrency such as Bitcoin, Ethereum, Dash and others moved firmly into the crosshairs of worldwide tax authorities last summer, as the CRA announced it had joined a new multinational group called the J5, aimed at combating international tax evasion.

The group’s directive includes sharing information and joint investigations with a view to fight the risk from virtual money on tax administration and collection.

Indeed, says Rotfleisch, the CRA has already sent out its first round of audit letters in this regard, with selected taxpayers receiving a 13-page form entitled “In-depth Cryptocurrency Initial Interview Questionnaire.”

The letter features 54 questions asking taxpayers about the frequency of cryptocurrency transactions, the timeline of their dealings and the source of cryptocurrencies purchased, among other details, he says.

“The crypto blockchain identifies every holder of the specific unit of currency. The IRS is known to have software to decode the blockchain history, and presumably, the CRA has access to the same technology,” says Rotfleisch.

As such, for taxpayers with unreported cryptocurrency sales or trades from prior tax years, there are options, says Rotfleisch — as long as the CRA hasn’t yet been in touch.

“Any holder of Bitcoin who has not reported their transactions and who has not yet been contacted by the CRA can submit a voluntary disclosure to avoid tax prosecution, penalties and to reduce interest in some cases,” he says.

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