Are You a Victim of Investment Schemes, Scams in Blockchain and Cryptocurrency?
Published: February 21, 2023
Cryptocurrency Fraud Schemes Include Blockchain Fraud and Cryptocurrency Fraud
More than a few people have seen surprising riches as a result of the development of blockchain technology and cryptocurrencies. At the same time, the general public is unaware of and confused by the technology and economics of the cryptocurrency field. This gives scam artists a chance to take advantage of the public by offering them an uncertain road to wealth.
Along with telling us about straightforward frauds, our clients have also told us about businesses in the cryptocurrency industry that have erroneously demanded money under the guise of Canadian income tax or anti-money laundering compliance regulations. Investors in cryptocurrencies should be mindful that, in addition to fraud, the businesses they deal with could not comprehend Canadian tax laws or anti-money laundering compliance standards.
Clients of our Canadian crypto tax law firm have received a request like this from Continental Marketing Czech Republic s.r.o., a business that presents itself as giving services for investing in cryptocurrencies and goes by the name Nittrex. The customers used a Nittrex account for an investing plan that entailed purchasing and selling cryptocurrencies based on Nittrex's recommendations. Cryptocurrency arbitrage transactions were described as the investment approach. The client feedback from Nittrex indicated that this investing technique was quite successful. The clients were informed by Nittrex that they would need to make a sizeable payment into an escrow wallet set up by Nittrex in order to cover the taxes that would be due to the Canada Revenue Agency for Canadian income tax when they attempted to make their first significant withdrawal of funds from the account. According to Nittrex, both Canadian tax law and anti-money laundering regulations mandate this. Also mentioned was the fact that our clients couldn't pay CRA on their own.
The assertions stated by Nittrex are completely wrong. This is not how Canadian tax or anti-money laundering law functions, as will be discussed later. A payment on account of Canadian income tax to a private business or person is practically never necessary. This sort of demand is an indication of crypto fraud, therefore you should engage with the business or individual making it with the utmost caution. Information provided to our tax law clients was incorrect, but we cannot say for certain that Nittrex simply does not comprehend the Canadian cryptocurrency tax law and anti-money laundering compliance.
Are You a Victim of Investment Schemes, Scams in Blockchain and Cryptocurrency?
Clients of our Canadian crypto tax lawyers have been informed by their purported cryptocurrency investment managers that in order to withdraw cryptocurrency from their accounts, they must pay Canadian income tax. These investors have been advised to do this by their purported cryptocurrency investment managers. Because the investment manager is not immediately withholding taxes from investors or paying them to the CRA, this is a warning sign. You will not be able to collect the money back from the private entity if you pay a private entity on account of your Canadian income taxes since the Canada Revenue Agency will not give you credit for such payment. You should speak with a knowledgeable Canadian crypto tax lawyer as soon as you get such a request before transferring any money.
Typically, one of two options is used by Canadians to pay their income taxes. Normally, you can pay CRA directly. The second method involves the withholding of income tax by the entity disbursing the funds (for example, an employer withholding income tax from an employee's salary). Except for those very limited cases where withholding is appropriate, direct payment is the default and is applied almost invariably.
Only a few different kinds of scenarios call for the usage of the withholding procedure. In cases when the withholding approach is appropriate, the withholder must give the income recipient some sort of notification outlining the amount withheld as well as year-end crypto tax reporting. The amount that was withheld will subsequently be paid to the CRA by the withholder. It will be considered as having been paid in full by the taxpayer who had the money withheld. If the total amount withheld from a taxpayer exceeds the amount owed by the taxpayer, the CRA will provide a refund to the taxpayer. This withholding only applies to a select group of circumstances under the Canadian tax system, most notably:
- employees' salaries, wages, or employment benefits not being paid by their employers;
- RRSP withdrawals are being withheld by financial institutions;
- rent, interest, dividends, and some other forms of passive income paid to non-residents by some payors;
- paying commissions or fees earned by a non-resident providing services in Canada; and
- retaining a portion of the sale revenues owing to a non-resident who is selling real estate, resource properties, or forestry resources located in Canada.
None of the above withholding techniques will be used in the majority of valid crypto investing circumstances. However, there are certain exceptions, such as purchasing products through an RRSP that are intended to expose investors to cryptocurrencies. Consult a knowledgeable Toronto crypto tax lawyer if you are unsure about your circumstances.
Fraudulent Cryptocurrency Investment Schemes: Fraud in the Cryptocurrency Context
A Ponzi scheme is a type of classic fraud that involves raising money from investors, using those funds to send out frequent false claims of enormous profits to raise more money and to repay early investors, and then vanishing with the money before too many people try to withdraw their money. Cryptocurrency scammers may approach you for Bitcoin transfers in the context of blockchain technology or cryptocurrencies so they may utilize your funds for an alleged very successful trading strategy for cryptocurrencies. Scammers benefit greatly from this kind of operation.
One issue is the fact that the majority of time, transfers of Bitcoin or other cryptocurrencies are actually irreversible. There is no way to undo a Bitcoin transaction once you've given it to a fraudster. It is occasionally feasible to undo fraudulent or unplanned transactions in the conventional financial system after they have already occurred (e.g. credit card chargebacks). Similar to how they are unable to directly interfere to reverse transactions on blockchain ledgers, governments are also unable to do so.
Another benefit is that the general public is aware that some people have become extremely wealthy almost overnight through cryptocurrency investments. Due to this, it is simpler for a member of the general public to accept as true the tales of enormous riches that the scammers provide them. You generally won't have any means to immediately verify the success of the supposed investments once you've sent money to a fraudster who claims to be managing a crypto investment plan.
Cryptocurrency Fraudulent Investment Schemes and Canadian Anti-money Laundering Law
Clients who had demands for money that were wrongly justified on the basis of anti-money laundering laws and regulations have retained our Canadian crypto tax lawyers. Demands for more money based on the application of Canadian anti-money laundering law are a fraud warning sign since they do not go against the letter of the law. You should obtain legal counsel from a knowledgeable Canadian crypto tax lawyer if you have received such a demand. If such a demand is made,’ it is very likely that you won't be able to get your money back if you actually advance the funds.
The Proceeds of Crime (Money Laundering and Terrorist Financing Act) is the principal statute establishing Canadian anti-money laundering law (PCMLTFA). The Financial Transactions and Reports Analysis Centre of Canada is responsible for carrying out this statute's administration (FINTRAC).
The main strategy used by the Proceeds of Crime (Money Laundering and Terrorist Financing Act) to combat money laundering is to impose record-keeping and reporting requirements on financial service providers and other people or entities that engage in businesses, professions, or activities that are likely to be used for money laundering. Regulated entities must maintain a compliance program, put "know your client" procedures into place, retain records, and report specific sorts of transactions.
The Proceeds of Crime (Money Laundering and Terrorist Financing Act) regulates some entities, and FINTRAC keeps an eye on them to make sure they are following the rules. Those entities' reports are also received by it, and it analyzes them. The Financial Transactions and Reports Analysis Centre of Canada collaborates when necessary with law enforcement and other governmental organizations, who may subsequently take additional action in questionable circumstances.
None of these actions would call for further payments from a crypto investor to a person ostensibly managing a cryptocurrency investing service.
Additionally, organizations that run money services firms must register with FINTRAC. The public can browse this registration on the website of the Financial Transactions and Reports Analysis Centre of Canada. A firm is considered a provider of money services if it provides the people of Canada with at least one of the following services:
- trading in virtual currency
- dealing with foreign exchange
- issuing or redeeming money orders or other comparable negotiable instruments, or
- transferring or receiving money.
In other words, if you're a Canadian buying cryptocurrency through a middleman, that middleman needs to be registered. Extreme caution should be taken if the intermediary is not registered. Even though it's claimed that Nittrex has a platform that lets Canadians buy and sell virtual currencies, Nittrex is not registered with FINTRAC as of the time this story was published.
Pro Tax Tips: Fraudulent Cryptocurrency Investment Schemes
Be wary of investment offers that exhibit any of the following signs of fraud:
- promises of substantial profits with minimal risk,
- there is just a small window of time during which the investment is available for purchase,
- high-pressure sales techniques are used by the investment promoter.
- according to the description, an elite group is the only ones typically eligible for the investment (e.g. normally only to the very wealthy),
- the investment promoter is not authorized to sell investments.
You may check to see if a promoter is registered on the Canadian Securities Administrators' website using their national registration search tool.
If you ever get a request to make a payment to an entity other than the Canada Revenue Agency in relation to Canadian income taxes, you should speak with an experienced Canadian tax lawyer to ensure the request is legitimate. In all likelihood, the request is invalid.
For Canadian income tax reasons, you might be able to claim a loss that will assist reduce the amount of other Canadian income taxes you owe if you lose money as a result of a fraudulent investment scheme using cryptocurrencies. Canadians who have been the victims of fraud should also report the scam to the government via the RCMP and the Canadian Anti-Fraud Centre.
FREQUENTLY ASKED QUESTIONS
I advanced funds to a crypto platform and it is now asking me for additional payments for tax withholding before it will refund my investment. Is this really a CRA requirement for a refund of my investment?
If a crypto platform refuses to return your investment it is probably carrying out a fraud. There is no obligation for you to pay money to the platform for CRA withholding
The crypto trading platform I am using refuses to return my funds. What can I do?
You have probably been a victim of fraud and will probably not be able to salvage your investment. You should report the platform to the police. You may be able to claim a tax loss for your loss investment. You should consult with an experienced Canadian crypto tax lawyer for advice as to your possible deductions.