Worldwide Problems with Crypto, Regulations, and Tax Due Upon Seizure of Crypto Assets

Tesla Inc., a manufacturer of electric vehicles, said in May 2021 that it would no longer accept Bitcoin as payment. Tesla's statement reportedly caused cryptocurrency values to drop, according to CBC. China made its decision to prohibit all financial institutions and payment providers from offering services linked to cryptocurrency transactions public in June 2021.

The announcement by China to "crackdown on cryptocurrencies" reportedly made the price slide of cryptocurrencies worse, according to CBC. Furthermore, the Bank of Canada reportedly intimated that it would issue a challenge "declaring that cryptocurrency works against the public good." This was reported by CBC. And although many investors are concerned about perhaps losing their digital money, others have already "lost more than half their capital," according to CBC, as a result of the continued drop in the cryptocurrency market.

The news from Tesla Inc. reportedly caused the market value of the cryptocurrency industry to drop by roughly $1 billion US, according to the CBC. According to CBC, the Tesla Inc. news was a major factor in cryptocurrencies' 54% loss from their record high of $64,895 on April 14—the first monthly decrease since November 2018—and is what caused the market to fall by that much. Moreover, according to CBC, China's news aggravated the decrease in Bitcoin that was first prompted by Tesla's decision to cease accepting Bitcoin as payment.

According to the Canadian Broadcasting Corporation, by mid-May, Bitcoin had dropped by more than 50% and had "reached a three-and-a-half month low of $30,066," which was the lowest it has been since January 2021. Bitcoin reportedly hit a monthly low of $28,908 by the end of June, according to CNBC. According to CBC, the collapse in Bitcoin also had a detrimental effect on other crypto assets, such as ether, a token that can only be used on the Ethereum blockchain network. Ether just fell to its lowest point since late January 2021. Since then, of course, bitcoin hit a new low of just under $16,000 US in December 2022.

CBC reports that Bitcoin lost more than 50% of its value at its peak, despite the fact that it was already under pressure from Tesla and China's statements. Even worse losses "in percentage terms" were experienced by other cryptocurrencies, such as Dogecoin, according to CBC; nonetheless, investors who "purchased at margin" incurred the worst losses. Buying on margin is a "procedure where investors borrow money from their broker to invest but are obligated by lenders to pay back some of what they owe if the value of their investment falls below a specific threshold," as defined by CBC. Those investors who purchased on margin "are obliged to sell into a declining market," according to CBC, unless they have extra money to cover their loan balance in the event that they are required to return it. The margin calls have increased "volatility in the unregulated global crypto market," where some investors are borrowing from their broker "at ratios of 100 to 1," according to CBC, which cited the CNBC business news service. In other words, investors borrow $100 to buy equities for every $1 they have on hand. While margin traders run the danger of losing all they have invested in a falling market, this type of leveraged investing has the potential to be profitable while markets are rising. According to CBC, although Canadian brokerages do not provide these sorts of profits, "in a global market everyone pays the repercussions".

El Salvador, which utilizes the US dollar as its official currency, became the first nation to formally recognize cryptocurrencies as "legal currency" in June 2021, according to CBC. Nayib Bukele, the president of El Salvador, stated that the "government would ensure the convertibility to the precise amount in dollars at the moment of the transaction," as explained by CBC. In this situation, the decreases in Bitcoin over the last few years may cause some Salvadorans who just negotiated their salary in Bitcoin to second-guess their choice, according to CBC.

In addition, the Bank for International Settlements (BIS) published a research in June 2021 titled "Central Bank Digital Currencies: An Opportunity for Monetary System" (the "BIS Report") that clarified the market's ongoing difficulties. The BIS Study indicates that central banks "will start to produce their own digital currency," and they could even take steps to prevent the usage of cryptocurrencies, according to CBC. The conclusion of the BIS Study argues that "innovations like cryptocurrencies, stablecoins, and the walled garden ecosystems of large techs all tend to operate against the public good aspects that underlie the payment system," which is what CBC cited.

The Israeli parliament, the Knesset, joined the global trend of "producing NFT - a non-fungible token" in commemoration of the inauguration of Isaac Herzog, the country's new president, according to The Jerusalem Post. NFTs are simply digital assets that represent things (such as music, art, and films) that can be purchased and sold online. They are frequently encoded using the same software as cryptocurrencies, according to Forbes Media. According to The Jerusalem Post, some NFTs are growing in popularity throughout the globe, with one recently selling for $5.4 million. This NFT had the original World Wide Web code. The Knesset is the "first parliament in the world to develop an NFT," according to The Jerusalem Post, but the NFT's continued success on a worldwide scale may encourage other governments to follow suit. For instance, The Jerusalem Post reported that "artist Mike Winkelmann just sold an NFT for a record price of $69.3 million". The Knesset is a good example of how the involvement of government figures in NFTs and cryptocurrencies is growing.

The Bank of Israel is reportedly exploring Ethereum technology, according to a May Bloomberg article, as part of an internal digital trial that just officially started. According to a statement from Israel's central bank, the country's digital payment system might perhaps have a positive effect on the economy by "simplifying payment processes while guaranteeing security to all parties in a transaction," according to Bloomberg. Some people, according to Coindesk, believe that central bank digital currencies will build "effective and affordable infrastructure for cross-border payments". Also, according to Coindesk, the European Central Bank and Sweden's Riksbank are two of the financial institutions that are "actively investigating and building their own digital currencies in preparation for planned launches" over the course of the following five years. The US Federal Reserve, on the other hand, is taking a "more cautious approach" to the introduction of its own digital currency, again according to Coindesk.

CBC highlights some of the advantages of using digital money issued by central banks despite the continued difficulties the cryptocurrency market continues to face. CBC notes, unlike cryptocurrencies, which might theoretically "rise and fall suddenly", the value of digital money issued by central banks "are known". Yet unlike stablecoins, central bank-issued digital currency "may be spent everywhere as legal currency," according to CBC. "Cryptocurrencies tethered to an underlying asset," according to CNBC, are stablecoins. Additionally, both CBC and the BIS Report seem to indicate that digital coinage created by central banks might possibly have many of the advantages of cryptocurrency "without the problems". For instance, according to CBC, central banks' issuance of digital money "eliminates the function of a middleman" when investors move money, but they also "protect privacy while protecting the integrity of the payment system and law enforcement," according to the publication. The advantages of central banks producing digital currency, as noted above, are likely to be disputed by long-time cryptocurrency owners, according to CBC. In contrast to cryptocurrency, transactions, and payments performed using digital currency issued by central banks may be traceable by governmental authorities for a variety of purposes, including but not limited to taxes and law enforcement, according to CBC.

In connection with that, according to Block Crypto Inc., Israel's Minister of Defense authorized the seizure of cryptocurrency wallets on July 7, 2021, on the grounds that they may be linked to Hamas agents. The digital wallets contain a list of "84 addresses for Bitcoin, Dogecoin, Ether,  Dogecoin, and Tether among others," claims Block Crypto Corp. According to Block Crypto Inc., "the majority of these wallets are attributed to seven Palestinian people it connects with Hamas" by the National Bureau for Anti-Terrorist Funding. Although others "stay anonymous," other crypto wallets do not. Hamas, an Islamist terrorist organization, rules the Gaza Strip, according to Block Crypto Inc. Hamas or its affiliates have been recognized as terrorist groups by the European Union, the United States, and Israel claims Block Crypto Inc . According to Block Crypto Inc., Israel's Minister of Defense made an announcement stating that "any individual who claims ownership of any or all of The Property [namely, the 84 crypto addresses], may make their claims and submit them in writing to the Head of the National Bureau for Counter Terror Financing". Additionally, Block Crypto Inc. claims that "Hamas has been linked to utilizing cryptocurrency to raise funds" previously. For instance, according to Block Crypto Inc., an Israeli non-profit group sought to stop Hamas from using Coinbase in 2019, while the US Departments of Defense and Justice revealed a "major seizure operation that impacted cryptocurrency wallets controlled by Hamas, Al-Qaeda, and ISIS" in 2020.

Early in June 2021, according to CBC, US government authorities were able to retrieve the "bulk of a multimillion-dollar ransom payment" in the Colonial Pipeline attack. The CBC reports that this ransom recovery was the first operation carried out by a "specialist ransomware task force established by the Biden administration's Justice Department". This is a reflection of the more aggressive strategies being used by government authorities to combat "the expanding and increasingly catastrophic ransomware assaults" that are affecting a variety of global businesses, including but not limited to the crypto market, according to CNN.

In addition, the IFC reports that Kazakhstan has adopted a new tax law that would begin taxing cryptocurrency mining on January 1, 2022. Businesses are protesting the taxes of cryptocurrency mining, despite the fact that the new law is "anticipated to create billions in the national currency," according to IFC. Several companies, according to IFC, are against the new tax law and are worried about how it would affect the development of the mining sector in Kazakhstan. Activities related to cryptocurrency mining are subject to taxes under standard Canadian tax law regulations. The process of reporting revenues and assessing whether your cryptocurrency mining operations qualify as a company or a hobby for Canadian income tax purposes are complicated tax law matters. With regard to cryptocurrency mining, our experienced Canadian crypto tax lawyers may assist you in identifying your Canadian duties and tax planning possibilities.

The IFC reports make clear that governmental authorities around the world are concentrating on "the regulation of the cryptocurrency market," as in the case of the example given above, where China is outlawing the cryptocurrency market and has instructed its banks to stop facilitating cryptocurrency transactions. Furthermore, according to IFC, whereas Canada sent notices to "many exchanges [Poloniex and KuCoin] for failing to comply with laws within time," South Korea carefully crafted a complete set of standards for exchanges inside the cryptocurrency sector. Miners are preparing to leave Canada for alternative power sources, according to Coindesk, as a result of Canada's "stricter rules" due to its worries about the energy effect of bitcoin. Moreover, Bitmex and Binance are among the cryptocurrency exchanges that have left Canada in response to the country's new securities legislation. It is critical to understand that potential tax consequences may occur if the exit of cryptocurrency exchanges necessitates the conversion of any coin into any other coin or into fiat in order to transfer to another exchange. For example, the sale of cryptocurrency will result in a taxable event that must be recorded under Canada's Income Tax Act, which might result in a capital gain or business income. While it is unclear if stronger limitations and regulation of the cryptocurrency market and mining business would be effective, the IFC argues that governments are growing increasingly keen to keep control of their currencies.

Concerns Regarding Cryptocurrency: Worldwide Issues, Legislation, and the Tax Consequences of Seizing Crypto Assets

The cryptocurrency market is fraught with issues and difficulties, including particular cryptocurrency tax issues. In particular, as previously mentioned, Tesla reversed its decision to accept Bitcoin payments, China announced its decision to prohibit all financial institutions and payment companies from providing services related to cryptocurrency transactions, and central banks, like The Bank of Israel, are issuing their own digital coins while discouraging the use of cryptocurrencies. While many traders and investors are concerned about possibly losing their digital investments, others have already lost a sizable portion of their digital capital. Because of margin calls, some cryptocurrency traders are compelled to liquidate their holdings in a down turning cryptocurrency market. The Bank of Canada and other central banks are also indicating that they may "take steps to prevent the adoption of cryptocurrency," as was already indicated. Nonetheless, it is not obvious how efficient or successful central banks like Canada's Federal Reserve would be in restricting the usage of cryptocurrencies even if they take action. It is also unclear if the value of digital currency issued by central banks will perhaps increase volatility in other markets or even its own market, notwithstanding the turbulent character of the cryptocurrency market. It's crucial to understand that any adjustments to your cryptocurrency holdings, especially those made from coin to coin, may have Canadian crypto tax repercussions, even if they were made in response to market fluctuations.

Various governments throughout the world appear to be focusing their efforts on the regulation of various aspects of cryptocurrency. Kazakhstan, for example, plans to tax cryptocurrency mining, Israel has ordered the confiscation of a list of crypto wallets, and China has banned any cryptocurrency-related activities. Yet, it is uncertain if tighter limitations and controls on the cryptocurrency market, as well as the taxation of cryptocurrency mining, will provide governmental authorities control over their currencies.

Furthermore, as previously stated, Israel's Minister of Defense approved a seizure order for crypto wallets suspected of belonging to Hamas agents. Similarly, USA Today recently claimed that the "bulk of the $4.4 million cryptocurrency ransom payment in the Colonial Pipeline hack" had been recovered by US federal investigators. These cases give insight into governmental authorities' domestic powers in the context of cryptocurrency transactions and the cryptocurrency market. While some governments are keener to keep control over their currencies, others have the power and motivation to take cryptocurrencies wherever they think fit.

Our knowledgeable Canadian crypto tax lawyers can provide advice on the significant Canadian tax ramifications of governmental authorities seizing cryptocurrency. Governmental authorities may try to seize cryptocurrency wallets and information about cryptocurrency transactions in order to track down tax evaders, promote tax compliance, and recoup taxes on unreported income. Government agents could also be able to track down and look into other cryptocurrency wallets and their owners using the confiscated coins. It is crucial to be aware that the seizure of cryptocurrency assets has tax ramifications. For instance, confiscated cryptocurrency might provide assistance to government authorities regarding the adoption and application of tougher rules governing the taxation of cryptocurrencies. Also, the confiscation of cryptocurrencies may enable dealers and owners of cryptocurrencies to avoid paying taxes by fleeing nations that are enforcing restrictive legislation. A seizure of cryptocurrency assets is regarded as a disposition for tax purposes in Canada, and as such, under the Income Tax Act of Canada, such a taxable event is required to be reported on the income tax returns of the cryptocurrency holder, potentially leading to a capital or income gain or, very possibly, a loss.

Canada's Taxation of Cryptocurrency

All revenue derived from cryptocurrency transactions is classified as either business income or capital gain under Canada's Income Tax Act. Moreover, losses resulting from cryptocurrency transactions are classified as business or capital losses. For income tax purposes, taxpayers must determine whether a cryptocurrency transaction resulted in income or capital. When cryptocurrency is used to buy goods and services, the Canada Revenue Agency will consider the transaction a "barter transaction" for income tax reasons. A "barter transaction" takes place when goods or services are traded without the use of legal currency. The use of cryptocurrency to buy goods or services, on the other hand, will be regarded as a disposition for income tax purposes, resulting in a gain or loss.

Moreover, when a taxable product or service is traded for cryptocurrency, the GST/HST that applies to the property or service is calculated using the cryptocurrency's fair market value at the time of the transaction.

Pro Tax Tips - The Tax Consequences of Cryptocurrency

Canada has yet to implement laws, tax or otherwise, dealing specifically with cryptocurrencies or cryptocurrency transactions. Similarly, Canadian courts have yet to rule on a tax problem involving crypto or cryptocurrency transactions.

If you have any queries about the taxation of cryptocurrencies or cryptocurrency transactions or the possible tax consequences of governmental agencies seizing cryptocurrency, please contact one of our top Canadian tax lawyers. Our Taxation Certified Specialist A Canadian crypto tax lawyer with substantial knowledge of cryptocurrency taxes.

If you or your company has unreported revenue from cryptocurrency transactions or money that was incorrectly reported as capital gains rather than business income, you may be eligible for relief under the CRA's voluntary disclosures program (VDP). Voluntary disclosures, often known as tax amnesty, are a complicated area of law that needs in-depth research and counsel from an expert Canadian tax lawyer. Consider contacting our Canadian tax lawyer who is a qualified specialist in taxation for proper crypto tax advice on a prospective voluntary disclosure application.

The goal of the Voluntary Disclosures Program is to prevent "tax evasion and aggressive tax avoidance" in order to guarantee a responsive and equitable tax system for all Canadians. The Voluntary Disclosures Program in Canada encourages compliance with the law by allowing taxpayers, including businesses, to voluntarily (1) rectify erroneous or incomplete information and/or (2) reveal to the CRA information that had not previously been recorded. Under Canada's Voluntary Disclosures Program, Canadian taxpayers who have unreported income may be eligible for penalty reduction and partial interest relief. A valid Voluntary Disclosures Program application must include the following requirements:

• Be "complete";
• Be "voluntarily"
• Pay any upcoming taxes that are anticipated to be due. A taxpayer who at the time of the application was unable to make such payment may have asked for consideration of a "payment arrangement";
• Information on income taxes that are at least a year overdue should be included.
• Provide information on income tax or GST/HST for at least one past-due reporting period.

The taxpayer must submit a complete application to the program and fulfill the program's above-mentioned standards in order to be eligible for relief under the Voluntary Disclosures Program. Please contact our tax law office to receive tax advice from one of our top Canadian tax lawyers if you have unreported income or if you would want adequate crypto tax planning to lower your tax burden.

Disclaimer:

"Only general information is provided in this article. Only as of the publishing date is it current. It hasn't been updated, therefore it might no longer be relevant. It cannot or ought not to be relied upon because 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 a Canadian tax lawyer if you have specific legal inquiries."