Cryptocurrency has been an exciting asset thanks in no small part to its newness. Bitcoin, the oldest and most established cryptocurrency, has only been around since 2009. It only really entered the mainstream as prices soared from 9 cents in 2010 to $10,000 in late 2017, launching a craze that would lead to millions of new crypto users and even adoption by major financial institutions in the form of Bitcoin ETFs.
The boom attracted entrepreneurs, investors, tech developers, and plenty of new players. But the technology’s newness also meant there was plenty of confusion when it came to how investing in crypto would affect your taxes.
As tax agencies around the globe ramp up collection efforts and strengthen their abilities to track crypto investors, there has never been a better time to deal with potential tax arrears related to crypto investing.
In some cases, it may be too late to pre-emptively deal with taxes that you may owe from previous years. With tax agencies becoming increasingly aggressive about collecting payments from crypto investors who have not fully met their tax obligations, many are already facing tax audits. Taxpayers who have not yet been contacted by the tax authority May be eligible to avoid penalties and criminal prosecution by filing a CRA voluntary disclosure program (VDP) application.
If you are a crypto investor in Canada who is facing a tax audit, these are the steps you can take to get help with your CRA crypto tax audit and minimize the damage that can result from it.
Table of Contents
#1 Get Help from a Crypto Tax Lawyer
Once you find out that you are being audited, one of the first calls you should make is to a tax lawyer who understands the crypto industry.
A good crypto tax lawyer can provide experience dealing with the CRA, experience with tax audits, and end-to-end services from audits to legal representation should the audit lead to further charges.
#2 Provide Necessary Documentation
The CRA has the power to collect any documentation that they need from your home, workplace, bank, or even your accountant’s office. An audit can be broad in scope and go beyond crypto investing into other sources of income. It is important to retain and download your own copies of all trading transactions in case the trading platform fails, something that happened with the trading platform Qadriga.
#3 Prevent Unnecessary Penalties
An experienced tax lawyer can help you avoid unnecessary penalties and allegations. One of the major risks of a CRA tax audit is that it can lead to further investigation if you are suspected of deliberate tax evasion or fraud. Successful tax prosecution will lead to penalties and possible jail time.
#4 Negotiate with the CRA
As the CRA discovers new information about your finances and what you may owe, you need an advocate who can negotiate based on these new details. Part of the process may involve the CRA proposing a new amendment to past years’ tax returns. A good advocate may be able to provide a new proposal based on the new information.
#5 Use Crypto Tax Planning in the Future
Too many crypto investors have wound up in the CRA’s sights simply because they didn’t understand their tax obligations before they started trading. Not only will working with a tax planner teach you what you need to know about your tax obligations in relation to crypto it can also teach you legitimate strategies for reducing the tax bill on your investments.
The best way to prepare for an audit is to get help from an experienced tax lawyer who understands the ins and outs of the crypto industry and how cryptocurrency investments should be taxed.
