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Tax repercussions for Canadian taxpayers who lose cryptocurrency or non-fungible tokens as a result of fraud -A Canadian Tax Attorney's Advice on Canadian Crypto-Tax

Person putting a bitcoin in their pocket
By: Crypto Tax Lawyer

Published: September 7, 2022

Introduction: A global tax coalition focusing on cryptocurrencies

A global alliance of tax authorities, including the Canada Revenue Agency (CRA), pledged in the summer of 2018 to combine their efforts and identify cryptocurrency users who were evading paying taxes on crypto in Canada. Since then, the CRA, IRS, and other tax administrations have only improved the methods they use to track down cryptocurrency users for tax audits or to charge them with tax fraud.

International tax inspectors have found over 50 leads about cryptocurrency-related tax offenses. This includes one case that looks to be a $1 billion Ponzi scheme, as of May 2022, when cryptocurrency markets are already on edge due to the collapse of the putative stablecoin TerraUSD (UST). The use of non-fungible tokens (NFTs) in tax fraud and money laundering is another issue that tax administrators warn about.

This article initially describes the creation of the Joint Chiefs of Global Tax Enforcement, a worldwide tax alliance (J5). The J5's pronouncements regarding newly launched tax fraud investigations involving more than 50 particular targets in Canada, the United States, the United Kingdom, Australia, and the Netherlands are then covered. The J5's cautions on red flags pointing to probable fraud in NFT transactions are then examined in this article. This article next addresses the Canadian taxation of cryptocurrency losses or NFT losses brought on by fraud, and it closes with expert tax advice from our leading Canadian crypto currency tax lawyers who trade and invest in cryptocurrencies or non-fungible tokens.

The Joint Chiefs of Global Tax Enforcement are working together internationally to help the Canada Revenue Agency identify Canadian cryptocurrency investors and traders (J5)

On July 3, 2018, the CRA became a member of the Joint Chiefs of Global Tax Enforcement (J5), a multinational collaboration tasked with looking into crypto tax evasion and money laundering involving cryptocurrencies and NFTs. 

Along with the Canada Revenue Agency, tax authorities from Australia, the Netherlands, the United Kingdom, and the United States of America are also included in the J5. To address the difficulties that cryptocurrencies and non-fungible tokens provide for tax administrators in its member nations, the J5's mission is heavily centered on information exchange and collaborative investigations. The initiative aims to identify unreported assets and income for taxpayers, namely from holdings in non-fungible tokens and cryptocurrencies including Bitcoin (BTC), Tether (USDT), USD Coin (USDC), Binance Coin (BNB), Cardano (ADA), Solana (SOL), Polkadot (DOT), and Dogecoin (DOGE).

The establishment of the organization denoted a concerted attempt by tax authorities to gather knowledge about cryptocurrency and non-fungible token transactions involving taxpayers in Canada, Australia, the United States, the United Kingdom, and the Netherlands.

A $1 billion crypto ponzi and more than 50 specific leads on tax avoidance relating to cryptocurrencies

The J5 informed news media outlets that it has located more than 50 leads on tax offences involving cryptocurrencies in May 2022. The lead originate from each of the J5 nations: The United States, the United Kingdom, Canada, the Netherlands, and Australia. According to Jim Lee, Chief of Criminal Investigations for the US Internal Revenue Service, "several of these leads include people with significant NFT transactions involving possible tax or other financial fraud across our jurisdictions." The $1 billion Ponzi scam that one of these leads appears to be. "This lead impacts every J5 nation—billion that's with a "B," Lee explained.

Each nation has already started looking into tax crimes, and news organizations eventually anticipate an official statement from the J5 and its participants, such as the Canada Revenue Agency.

Red Flags for NFT are identified by The J5 to alert the public to risks

Banks, law enforcement officers, and private individuals should be aware of risks while working with non-fungible tokens, according to an intelligence alert issued by the Joint Chiefs of Global Tax Enforcement (J5) on April 28, 2022.

When working with non-fungible tokens or preparing to buy one, the bulletin's list of "J5 NFT Marketplace Red Flag Indicators" should cause you to be wary of certain things. The purpose of the bulletin is to provide banks, law enforcement agents, and members of the private sector with some information regarding potential warning signs in the NFT market. The bulletin, as the J5 says, isn't intended to be a comprehensive list of the dangers posed by NFTs; rather, it is a collection of best practices that the J5 members have gathered through several NFT investigations.

Will Day, the Deputy Commissioner of the Australian Taxation Office, stated that this bulletin is "designed to be the first of many that may be utilized by financial institutions to help in the battle against tax fraud and money laundering utilizing virtual property."

Instances of tax fraud or money laundering may be disclosed by account/transaction attributes listed in the J5 NFT Marketplace Red Flag warning. As "powerful indicators" of fraud, the following account or transaction characteristics were included in the bulletin:

  • Transactions above $100,000 on the secondary market or in newly issued coins without any discernible community.
  • A close-knit set of digital accounts that transact with one another is referred to as a network of sending and receiving parties to the same transaction or series of transactions.
  • Recently created non-fungible tokens that are sold for high prices right away and at prices that aren't equivalent to those of other tokens in the collection of NFTs.
  • NFTs that are initially purchased for a high price before being sold to the same party again for a much lower price (or from a third party).
  • Regular circulation of NFTs with poor value. On the message, the NBA's Top Shots NFTs were used as an illustration: "On Top Shots with the NBA, you see a lot of low value (i.e., under $10,000) NFTs being purchased on the same day, with owners hanging onto their positions for only a short period of time. This can be a means of laundering money”.
  • A noticeably overvalued or underinflated NFT that is regularly exchanged in a condensed period of time.
  • Wash trading is the practice of artificially inflating the sale price with each transaction between related accounts.
  • The contract's address does not correspond to the one listed on the website for the NFT project, which is incorrect.
  • Before a transaction can be completed, you must provide your MetaMask wallet address and your Ethereum wallet's recovery phrase.
  • False NFT offers provided through email as part of phishing schemes.
  • Airdrops or distributions of fake tokens.
  • Impersonating someone on social media by using unverified profiles without any followers who are actually online.
  • The use of counterfeit NFT collections as a fraud exploitation.
  • Pricing: If there is a significant price difference between the site and a reliable marketplace, there is cause to believe that the site is a hoax.

These characteristics of the account or transaction served as "moderate indications" of scams:

  • Smaller sums split out among numerous transactions with no identifiable society, such as five transactions with a total value of under $10,000 dispersed out over several days. The alert advises caution since it may be a product of software testing "when looking at this indication in isolation."
  • Code reuse in the NFT. It's also crucial to remember that sharing code within the software development industry is frequent, thus this signal by itself is not conclusive. 
  • Minting an NFT, purchasing it at a premium, and then losing a lot of money on the sale. As an illustration, a buyer may buy an NFT for $1M and sell it for $750K in a relatively short period of time. Additional factors would need to be taken into account before drawing a judgment because this might also be the result of market fluctuation generally.
  • On the marketplace profile, there isn't a thumbnail. (Observe that this signal alone is not conclusive, just as the other ones mentioned previously.)
  • Market profile does not have a checkmark for verification (please note that this signal alone does not mean anything; see also the other indicators above): Authenticated accounts marked with a blue checkmark (OpenSea). Legal accounts, nevertheless, unauthorized individuals have the ability to hack and utilize them for money laundering or frauds. 
  • Traceability on the project has no traceable contract address on Ethereum (Note: This has also been demonstrated by certain real initiatives.)
  • The exact date and location of the NFT's minting are unknown.
  • Areas of the NFT for assets and project explanation are blank or unclear (Note: This has also been demonstrated by certain real initiatives.)
  • A large proportion of sales in a collection were made from similar or grouped wallets.

It is made very apparent in the J5 NFT Marketplace Red Flag notice that no one signal can prove that anything is fraudulent. People and organizations should employ a thorough screening process when looking for possible fraud, not just keeping an eye out for the warning signs outlined above but also putting Know-Your-Client precautions in place. 

Tax Repercussions for Canadian Taxpayers Who Lose Cryptocurrencies or Non-Fungible Tokens as a Result of Fraud

A "disposition" of "property" results in a "tax event" for the Canadian taxpayer who made the disposition. The term "property" is defined broadly in the Income Tax Act of Canada, and this covers intangible private possessions like cryptocurrencies and non-fungible tokens (NFTs).

The term "disposition" is defined rather broadly under the Canadian Income Tax Act. Fundamentally, a "disposition" takes place whenever a person gives up any rights to property (such as possession, control, etc.)—regardless of whether they do it freely or unintentionally, and regardless of whether they are paid for it. Consequently, every one of the following transactions qualifies as a "disposition":

  • A property's sale;
  • Contribution or a gift;
  • The repayment or termination of a debt;
  • The seizing of an asset through force or confiscation;
  • Ruination of an asset; and
  • A property's being stolen from, lost, or abandoned.

As a result, if a taxpayer loses cryptocurrencies or non-fungible tokens due to fraud, the taxpayer is considered to have "disposed" of such digital products. Because of the disposition, the taxpayer may be able to recognize the ensuing loss for purposes of income taxation. For the digital products that were stolen in the scam, the taxpayer likely received no proceeds. As a result, if the tax cost to the taxpayer for those digital assets is more than zero, the taxpayer may realize that sum as a loss for the year in which the fraud deprives the taxpayer of the digital assets.

The ensuing loss may be either a capital loss that is only 50% deductible or a business loss that is completely deductible. For business income and capital gains, respectively, the Income Tax Act of Canada establishes two completely separate tax systems. The bottom line is that if your digital asset transactions are treated as income, both your earnings and losses from trading cryptocurrencies or NFTs are completely deductible. Conversely, only half of your earnings are taxed and only half of your losses are deductible if your crypto asset transactions receive capital treatment. Furthermore, unlike losses on a capital account, which may only be used to offset capital gains, losses on income account can be deducted against any source of income.

One of the key factors that the Tax Court and the Canada Revenue Agency will take into account when deciding whether the transaction resulted in a capital growth or business revenue is the taxpayer's objective or desire at the time of purchasing the cryptocurrency or non-fungible token. However, in order to determine a taxpayer's purpose, the Tax Court and the CRA will concentrate on the factual details surrounding both the acquisition and selling of the cryptocurrency.

Read "Tax Guide for Crypto & Bitcoin Businesses: Computing Inventory Costs" for further details on how to differentiate between capital gains and business revenue in the case of bitcoin transactions. For a comprehensive tax opinion outlining the proper way to minimize your bitcoin fraud losses, get in touch with one of our top Canadian crypto-tax lawyers.

The Voluntary Disclosures Program (VDP) for Unreported Cryptocurrency Income & Protecting Your Constitutional Rights: Professional Canadian Tax Advice from a Canadian Crypto-Tax Lawyer

In each of the J5 nations, including Canada, the Joint Chiefs of Global Tax Enforcement have located more than 50 leads relating to tax offences involving cryptocurrencies. The inquiry into crypto tax crimes by the Canada Revenue Agency has already started. 

Unreported earnings from transactions using cryptocurrencies or non-fungible tokens should absolutely worry Canadian taxpayers. What happens if you don't report cryptocurrency on taxes or omit your bitcoin or NFT revenues on your tax filings, is that you run the danger of being held criminally liable for tax evasion in addition to civil financial penalties including gross negligence fines.

According to the CRA's Voluntary Disclosures Program, you could be eligible for relief (VDP). If your VDP application is approved, the CRA will forgo criminal prosecution and forgive fines for gross negligence (and may reduce interest). However, a voluntary disclosure application must be submitted in a timely manner, particularly in the case of Canadian leads being investigated by the Joint Chiefs of Global Tax Enforcement. If an application is not "voluntary," the CRA's Voluntary Disclosures Program will reject it and hence refuse relief. This basically implies that before the CRA begins looking into the non-compliance you intended to disclose, the VDP must receive your voluntary disclosure petition. 

To find out if you're eligible for the Voluntary Disclosures Program, arrange a private appointment with one of our knowledgeable Canadian tax lawyers. Information that is shielded by the solicitor-client privilege cannot be required to be produced by the Canada Revenue Agency. To put it another way, the solicitor-client right shields the CRA from finding out about the legal counsel you obtained from your Canadian crypto conversely tax lawyer. Yet, the conversations you have with an accountant are unprotected. Therefore, you should communicate with a Canadian tax lawyer first if you need tax assistance but don't want the CRA to know about it. If an accountant is required, your Canadian tax lawyer can extend the right and hire the accountant on your behalf. Numerous Canadian taxpayers have benefited from the expertise of our knowledgeable Canadian crypto-tax lawyers in bringing their bitcoin and NFT transactions into conformity. A well-written disclosure application not only improves your chances of having your disclosure accepted by the CRA, but it also paves the way for a request for judicial review to the Federal Court should the CRA unjustly reject your disclosure.

The Canada Revenue Agency needs a search warrant to acquire evidence while looking into alleged criminal offenses, such as tax evasion via cryptocurrencies. According to Sections 231.1 and 231.2 of the Canada Income Tax Act and Sections 288 and 289 of the Canada Excise Tax Act, The Canada Revenue Agency (CRA) is unable to rely on its typical CRA crypto tax audit and information-gathering capabilities. The tax auditors of the CRA may request and review documentation under these sections.

However, the CRA is only permitted to utilize these authorities during civil tax audits; it is not permitted to use them when conducting a criminal inquiry into tax evasion. This is due to the fact that when the CRA's goal changes from a civil tax audit to a corruption investigation, the Canadian Charter of Rights and Freedoms' safeguards are triggered (Constitution Act, 1982). Everyone in Canada is given a number of rights under the Charter while facing criminal charges, including tax fraud.

Contact with one of our skilled Canadian crypto-tax lawyers immediately to make sure the Canada Revenue Agency doesn't violate your civil charter rights. Contact our certified Canadian taxation lawyer If you want to know if the CRA has subtly turned your civil tax audit into a criminal tax probe and to ensure steps will be taken to protect your rights.

Frequently Asked Questions

Question: I've been trading several cryptocurrencies and non-fungible tokens for the past few years, and I've earned a lot of money. But none of it was disclosed on my Canadian income tax forms. What should I do?

Answer: The Voluntary Disclosures Program of the Canada Revenue Agency may be able to provide you with assistance (VDP). The CRA will forego criminal prosecution and remit fines for gross negligence if your VDP application is approved (and may reduce interest). 

Question: I live in Canada, and I intentionally chose bitcoin and non-fungible tokens to hide my revenue. My bitcoin and NFT transactions can fall under the category of money laundering in some cases. It turns out I was mistaken when I originally thought the Canada Revenue Agency couldn't possibly be able to track cryptocurrencies and other blockchain transactions. I wish to petition for relief under the Voluntary Disclosures Program of the Canada Revenue Agency in order to avoid criminal punishment. Am I eligible for relief?

Answer: Only if a number of requirements are met by your VDP application will the Voluntary Disclosures Program give relief. For instance, if an application is not "voluntary" it will be rejected by the CRA's Voluntary Disclosures Program, which will result in the denial of any relief. In essence, this implies that before the CRA begins looking into the non-compliance you intended to reveal, the VDP must receive your voluntary disclosure application. The Joint Chiefs of Global Tax Enforcement, an international group of tax authorities, recently identified over 50 leads regarding crypto-related tax offences in numerous nations, including Canada. Therefore, your VDP application can be very time-sensitive. Do not wait! Make an appointment for a private, confidential consultation with one of our knowledgeable Canadian crypto tax lawyers right away. 


Only general information is provided in this post. It is only current as of the publishing date. It is not updated; thus it might not be relevant anymore. It cannot or ought not to be relied upon since it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. You should contact with a lawyer if you have particular legal inquiries.

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