Cryptocurrency 'grossly underreported' on taxes, says lawyer

Cryptocurrency investors need to prepare for the tax season like everyone else.

Alexia Hefti, blockchain tax lead at Deloitte, said it's a common misconception that you only have to report your gains when you trade cryptocurrency back into Canadian dollars.

Another misconception is that people actively trading cryptocurrencies don't need to record those trades.

"A lot of Canadians this year have been trading different types of cryptocurrencies — so for example bitcoin to ether, ether to litecoin, and so on — each of those transactions is a disposition of property and is taxable," Hefti said.

No different than a stock portfolio

Dennis Domazet, partner in charge of Deloitte's blockchain practice in Canada, said Canadian taxpayers are subject to tax on their worldwide income.

"As a starting point, everybody should approach… any sort of profit making activity as taxable," Domazet said.

The way cryptocurrency holdings will be dealt in your taxes with will vary depending on how you used it. People actively trading cryptocurrencies, for example, will have to use different reporting methods than people using it to make purchases, or simply holding it.

To prepare for taxes, you'll need to list when you purchased the cryptocurrency; when you sold it and what you sold it for; or if you exchanged it for another cryptocurrency, what you exchanged it for. Many crypto exchanges will provide users with this information.

Domazet said the current tax rules for investing can be applied to cryptocurrency investments.

"It's really no different than somebody who has a complex stock portfolio," Domazet said.

The problem of definition

The CRA declined to speak to the CBC for this article, but they said in a statement that they classify digital currencies as commodities, and that any time you use cryptocurrency to pay for goods or services, it's considered a barter transaction.

Cloudesley Hobbs is the chief legal officer of Dominion Bitcoin Mining Company, and one of "very few" lawyers in Canada specializing in cryptocurrency law.

He thinks Canada Revenue Agency needs to clarify the definition of cryptocurrencies.

When the government first classified digital currency as a commodity in 2013, there were only a handful of coins. Today, there are thousands, and not all of them work like the earliest few.

"Cryptocurrencies... are not exactly all the same flavour," Hobbs said.

He said bitcoin is handled predominantly as a commodity, while ethereum acts more as an agreement for processing power on the ethereum blockchain, which is more like a service contract.

More complications ensue if you hold your bitcoin in a third-party wallet based in whole or in part in a foreign country — then it might be considered foreign property.

"Without some further clarification from the CRA in terms of how those transactions are going be dealt with, it's left the public in a little bit of a grey zone."

'Grossly underreported'

Hobbs said in the United States, cryptocurrency gains are "grossly underreported," but the Internal Revenue Service is pushing for change.

In November 2017, the IRS tapped the cryptocurrency exchange CoinBase to release client information for more than 14,000 customers.

Similar action could be taken in Canada, Hobbs said.

Cryptocurrency transactions are anonymous, but they're not untraceable, and any exchange that has your information may be compelled to give it up.

"Technically, I would say that your duty is to report all forms of income to Revenue Canada and that cryptocurrencies are taxable, so the proper stance should be advising the CRA of any cryptocurrency holdings a person may have for tax purpose."

Canadian accountants can apply current tax rules for investments to the cyptocurrency sphere, or if you're doing your own taxes and you're not sure how to handle your digital currency investments, Hobbs recommends using the CRA's voluntary disclosure program.