Crypto Tax Fraud, Tax Evasion & Prosecution

Tax evasion is a criminal offence under section 239 of the Income Tax Act and section 327 of the Excise Tax Act. It involves the falsification of records and claims related to your income and taxes, intentionally not reporting crypto gains, inflating expenses, and fraudulently claiming benefits or refunds. Tax evasion charges come with harsh penalties.

Crypto tax evasion simply refers to not paying the taxes on the income you earn from NFTs or cryptocurrency. The CRA treats cryptocurrency as a commodity. Any income earned from buying, selling, mining, or trading with cryptocurrency is taxable.

The CRA is increasingly capable of identifying crypto traders and investors, and Canada has joined international efforts to track down and investigate cryptocurrency-related tax evasion.

Tax fraud is not the same offence as tax evasion. It is an offence under section 380 of the Criminal Code. Tax fraud involves using deceit, falsehoods, and fraudulent means to defraud a person or the public of money, including the CRA. Crypto tax fraud is any fraudulent activity related to the taxes you are obligated to pay related to cryptocurrency.

There are effectively two types of crypto tax evasion:

• Evasion of assessment: The taxpayer willfully underreports or omits income, such as income generated from selling cryptocurrency. This is the most common type of tax evasion and includes income that could be categorized as either business income or capital gains. Not reporting wages paid in cryptocurrency also counts as evasion of assessment.
  
• Evasion of payment: The tax assessment has been made, but the taxpayer conceals assets or funds that could be used to pay the tax liability. This prevents the CRA from taking collection actions on those assets.

In Canada, there is a difference between an audit and tax prosecution. When an audit is conducted, the CRA collects information to determine your tax liability, and you will be expected to pay what you owe. There are no criminal charges.

Tax prosecution happens after there is a criminal investigation into tax evasion, tax fraud, and other violations of tax law. The investigation is carried out by the CRA, but once the investigation is over, the CRA may recommend a case to the Public Prosecutor Service of Canada (PPSC). During the prosecution stage, it is the Crown (Department of Justice CRA lawyer’s) responsibility to show that the taxpayer willfully broke Canadian tax laws.

The penalties for crypto tax evasion are the same as those for any type of tax evasion. If you do not pay the NFT or cryptocurrency taxes that you owe on purpose, you will have to pay the full amount of taxes that you owe to the CRA, as well as fines up to 200% of the taxes owed. In addition, you can face a jail term of up to five years for tax evasion. A conviction of tax fraud could come with a jail term of up to 14 years.

If you have previously avoided paying crypto taxes and you are concerned about the possibility of crypto tax evasion charges, the CRA has the Voluntary Disclosure Program. You can apply to the Voluntary Disclosure Program to correct any information that was omitted or erroneous on previous years’ tax returns.

You don’t have to report tax fraud to the CRA. Through the Voluntary Disclosure Program, you can correct previous years’ tax returns and pay what you owe without facing tax evasion or tax fraud charges.

If you successfully submit to the CRA Voluntary Disclosure Program, you can pay the NFT or crypto taxes that you owe from previous years without facing other harsher penalties, whether they would be the result of a CRA crypto tax audit or from crypto tax prosecution.

This is a topic that often leads to some confusion. While you cannot go to jail for having an unpaid tax liability, you can face jail time if you falsify your tax return, such as not reporting income or claiming expenses or deductions you are not entitled to.

The CRA has become increasingly proactive about investigating crypto tax evasion. There are increased efforts to track crypto investors and international cooperation to share information between tax administrators.

The CRA has even compelled crypto wallet providers to provide information about customers with high-value accounts, and it works with crypto exchanges to track transactions. This is leading to more crypto tax prosecution as the CRA aims to collect crypto taxes in Canada.

The criminal investigation process alone can take years to complete. There are a number of reasons the CRA’s Criminal Investigations Program may begin an investigation, including internal referrals, tips from individuals, and publicly available information such as the media. 

At the end of the investigation, the CRA may refer the case to Crown (Department of Justice CRA lawyer) prosecutors, at which point tax prosecution can last even longer. Tax prosecution can absorb your life. Contact a crypto tax lawyer to represent you throughout this stressful process.