Crypto Tax Audits

A crypto audit is a tax audit conducted by the CRA where proceeds earned from cryptocurrency are in question. During a tax audit, the CRA will investigate any records relevant to the taxpayer’s income. These records may include journals, ledgers, expense accounts, invoices, financial records, and bank information. The CRA increasingly has ways of tracking NFT and crypto transactions and traders, especially among taxpayers with significant assets.

The CRA treats cryptocurrency and NFTs the same way it taxes commodities. Crypto tax will either be income tax or capital gains tax. If it is income, i.e., you earn regular income from cryptocurrency as a business or, in some cases, even as a regular hobby, all of the profits you earn from NFTs or crypto are treated as taxable income. If it is considered a capital gain, as many property and asset sales unrelated to your profession are, only half of the profits are taxable, and they can also be offset by claiming a capital loss from other transactions.

A CRA crypto tax audit can take anywhere from several weeks to several months. Once the audit is complete, the auditor will recommend adjustments to the tax returns under review. Those adjustments are made in writing and submitted to you.

In some cases, the auditor may trigger an investigation by the Criminal Investigations arm of the CRA, which can investigate for tax evasion and tax fraud. This will generally result in a search warrant be executed against the taxpayer and often the accountant as well. If this is a possibility, you will want representation on your side as quickly as possible.

The CRA has the authority to audit anyone who pays taxes in Canada. Businesses tend to be much more likely to be audited than employees, including small and medium-sized businesses, as well as large businesses and corporations. Businesses in industries with a history of poor compliance are also more likely to be targeted. Large transfers into or out of a bank account or cryptocurrency exchange will also likely figure a tax audit. In the past several years, the CRA has made several announcements related to its focus on auditing cryptocurrency transactions.

There are several red flags that commonly trigger audits. They include things like reporting recurring losses or below average income for taxpayers in your industry, claiming abnormally high expenses (such as 100% of a business vehicle), having offshore accounts, and large fund transfers.

If you’re a NFT or crypto investor with significant assets, you may be more likely to go through a tax audit, as the CRA is targeting crypto transactions in an effort to crack down on tax avoidance, tax evasion, and criminal activities that use NFT or  cryptocurrency. Large transfers into or out of a bank account or cryptocurrency exchange will also likely figure a tax audit.

The CRA has four years from the date on your Notice of Assessment to audit your tax return. Your Notice of Assessment is a document you receive when the CRA confirms they have received your tax return. After four years have passed, a statute of limitations applies, though there are exceptions. No statute of limitations applies if the CRA believes you have committed tax fraud or that you have been careless or wilfully misrepresented your tax situation.

The CRA tax audit will typically begin with a detailed and lengthy crypto tax questionnaire. During a CRA crypto tax audit, you can expect the CRA to do a thorough investigation of your financial records and statements, whether they pertain to an individual or a business. A crypto tax audit will also look at offshore crypto accounts, past cryptocurrency transactions, and other investments to compare revenue sources with your previous tax returns.

When you try to deal with the CRA alone, you run the risk of not being listened to. The auditor may find something in your records that does not immediately make sense, and they don’t want to hear your explanation.

Crypto Tax Lawyer has years of expertise dealing with CRA tax audits. We know how to communicate with the CRA. We will help you prepare necessary documents, avoid common mistakes, respond to the CRA, and avoid unnecessary penalties or allegations. Contact us today if you need representation during a crypt tax audit.