Crypto investors are facing increased scrutiny around the world as tax agencies are catching up and developing policies for monitoring blockchain transactions. They’re working with exchanges and crypto wallet companies to get data on major transactions.
In Canada, the Canada Revenue Agency has been actively targeting crypto investors in an effort to collect tax arrears and make sure investors are following the same tax rules as everyone else.
This has the potential to impact many investors who d0 not fully understand their tax obligations. Given how recently tax rules around crypto assets were introduced, it’s not an uncommon situation to be in. As governments have scrambled to catch up, investors may not have been aware of their tax obligations.
If you’re worried about a tax audit on crypto investments, or you’re already facing one, you need to know more about the CRA and cryptocurrency, as well as what you can do to protect yourself or avoid an audit from the start.
Use the Voluntary Disclosure Program
This is a great solution for crypto investors who are not being audited but who now realize that they have unreported income from crypto transactions and are likely to owe taxes on them.
Using the Voluntary Disclosure Program, you can refile previous years’ tax returns and report previously unreported income without facing any penalties. It’s a program designed to encourage people to declare taxes of any kind that they did not report at the time, and it can be very useful for crypto tax investors.
There are some rules you should be aware of around the Voluntary Disclosure Program:
- You should be prepared to pay the taxes on unreported income right away.
- You cannot already be under investigation or being audited when you file a VDP.
What to Do in a CRA Crypto Audit?
If you are already being audited by the CRA, this is what you can expect.
#1 Get the Necessary Documentation
The CRA can take a lot of documentation in an audit. Unfortunately, this means that they can also take documents related to other sources of income and reporting. The scope of an audit can easily expand as auditors question other elements of your finances.
Poor documentation can leave you at the mercy of the CRA, and it’s the number one mistake crypto investors make regarding their taxes.
#2 Get Professional Support
Trying to handle an audit on your own can be an expensive mistake. If the CRA is auditing you and you’re worried that you may owe large sums due to crypto investing, find a tax lawyer who understands all of the rules around cryptocurrency transactions.
They can provide legal advice and support in negotiating with the CRA. The CRA will likely propose an amendment to your previous years’ tax filings that show how much you owe in back taxes. You may want to propose an amendment with more information.
#3 Prevent Further Penalties
The best thing you can do in an audit is to make sure that you avoid further penalties or allegations of tax fraud or avoidance. Legal support can help you avoid tax prosecution or paying unnecessary penalties.
If you can avoid a CRA crypto tax audit with the Voluntary Disclosure Program, it’s advisable that you avoid the hassle and potential penalties.
