TAXATION OF CRYPTOCURRENCY

This article intends to provide a small insight into the world of Cryptocurrency and taxation in Canada.

Characterization Of Cryptocurrency

The CRA characterizes cryptocurrency as a commodity.

The use of cryptocurrency to exchange goods or services results in the acquisition or disposition of property or in an income or expense.

The receipt of cryptocurrency in payment for goods or services constitutes income and attracts sales and income taxes based on the fair value of the exchange.

Trading In Cryptocurrency

A taxpayer must determine if he is a trader or an investor.

Gains and losses from “Business” trading are treated as regular income/losses.

When property is held for long term growth, any gain or loss should be treated as capital gains or losses.

Cryptocurrency Scams

Losses incurred as a result of a theft or some sort of embezzlement, are deductible as a business loss or a capital loss depending on the nature of your activities.

However, you must be able to prove your loss. Due to the nature of the asset, this might prove to be a very difficult exercise. A loss would be determined in reference to the actual monetary value of the cost of the commodity that was lost.

T1135 – Specified Foreign Property

Taxpayers must determine where their investments are actually held.

Cryptocurrency is considered by the CRA to be funds or intangible property and when held outside of Canada is subject to the “specified Foreign Property” rules. Foreign accounts or interests in partnerships, trusts, or corporations are all covered by these rules.

Failure to timely file form T1135 brings significant late filing penalties.

Mining Cryptocurrency

Mining in Canada is usually considered to be a business and therefore subject to all the “Doing Business in Canada” rules. If the mining is not done in Canada, all the regular business income reporting rules apply. You cannot escape.

Cryptocurrency Is Anonymous Until!

A coin exchange offers certain anonymity as the cryptocurrency is held in a virtual wallet. This anonymity may work until you want “Real” money. At that point, you are unmasked.

Canada And The IRS

This year the IRS has formed a team of specialists to investigate cryptocurrency-related crimes, including international money laundering and tax evasion.  In November 2017, after a yearlong lawsuit, the IRS won a judgment that forced Coinbase, the largest American—based cryptocurrency exchange, to turn over account records for more than 14,000 customers. In January 2018, Coinbase sent 1099-K forms to a number of its current users, informing them that their trading records were being reported to the IRS and reminding them to pay the taxes they owed.

With increased vigilance by the IRS and with the understanding that the IRS and Canada can exchange information, taxpayers should not feel secure about their anonymity.

Exchange Of One Cryptocurrency For Another

From an income tax perspective, this scenario is a barter transaction. Each side of the transaction is characterized as a disposition of property, and each disposition is taxable on the basis of income or a capital gain using the fair market value of the cryptocurrency at the time of the transaction.

Cryptocurrency And RRSP, RIF, RESP or TFSA

There is no way to legally hold cryptocurrency in a “Registered Account”.  There are exchange traded funds that can be acquired for this purpose. Investors must be mindful that such funds are new and have no track record and therefore could lack “liquidity”.

Cryptocurrency And Taxation Is Not An Easy Matter

Taxpayers should consult their professional advisors if there are doubts and be reminded that it is against the law to not report all of your income. Trading in cryptocurrencies is a taxable event.

DISCLAIMER:  Tax laws are complex and are subject to frequent change.  Professional advice should always be sought before implementing a tax planning arrangement or taking an uncertain tax filing, position.  Litwin CPA Inc. cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.

Article written by Michael Litwin, CPA, CA, TEP on August 23, 2018.

CRA Scam Notice

Fraudulent communications from the Canada Revenue Agency (CRA) have been recently sent to taxpayers through telephone, email, or text message.

It is important to be cautious and not disclose any information when receiving a message from the “CRA” through these methods of communication.

These scams often insist that personal information is needed in order for taxpayers to receive a refund or a benefit payment or they urge taxpayers to visit a fake CRA website which then asks to provide personal information to verify their identify.

These scams include:

  • Receiving an email with a link requesting personal or financial information
  • Asking for personal information by email, text message or phone call
  • Requesting payments through prepaid credit cards

 

If the “CRA Agent” leaves you a call back number and you call it, it might seem legit but do not provide any information to them. It may seem very realistic but it is really a scam. You can search the phone number online – however, don’t believe the caller ID as technology makes it easy for scammers to fake caller ID information.

DO NOT:

  • Provide any personal information by email, text message or telephone call
  • Click on any links sent through email or text message
  • Say words such as “yes” or “agree”

 

WHAT TO DO TO PROTECT YOUR INFORMATION:

  • When you are going on vacation, make sure that a trusted person collects your mail or put a lock on your mailbox.
  • Shred your bills and other important documents before throwing them out.
  • Update your passwords regularly – don’t use same password for every account/profile. A strong password should include a mix of upper and lower case letters, numbers and symbols.

AMERICANS RECEIVING GIFTS OR INHERITANCES FROM NON RESIDENTS

Your Children Live In The United States and you want to make a gift or leave an inheritance upon death

The IRS Has Rules for Reporting Large Foreign Gifts and Inheritances

Internal Revenue Code 6039F, Notice 97-34 and IRS Form 3520

The Internal Revenue Code requires that U.S. persons (including immigrants, legal and illegal, living in the United States) must report certain large foreign gifts. If a U.S. Taxpayer receives annual aggregate gifts above $15,797 (2017) from a foreign corporation or partnership or aggregate gifts or bequests from a non-resident alien or foreign estate exceeding $100,000, the taxpayer must report the amounts and sources of these foreign gifts and bequests on IRS Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts (From 3520).

The IRS can impose penalties for failure to file a required Form 3520.

The Internal Revenue Tax Code sets the threshold for gifts (or bequests) received from non-resident alien individuals and foreign estates at $10,000. In Notice 97, the IRS raised the threshold on gifts given by non-resident aliens and foreign estates to $100,000. A foreign gift  limit given by foreign corporations or partnerships remains at $10,000, but this threshold amount is adjusted yearly for cost-of-living and is currently up to $15,977. Once the threshold is reached, reporting is required regarding each such gift over $5,000. These threshold amounts are calculated on the aggregate gifts received from foreign sources.

The instructions to Form 3520 requires a U.S. person who receives a gift or bequest of more than $100,000 from a foreign estate to file a Form 3520. The IRS requires that a Form 3520 be filed for any gift or bequest received from a person who is not a United States person. There are some exclusions. Large gifts received from foreign persons and properly reported on a Form 3520 are generally non taxable.

The Information Needed to Prepare and File Form 3520
Notice 97-34 requires Form 3520 to be filed once a year for all reportable gifts (and bequests). Form 3520 should be filed separately from a U.S. person’s Form 1040. Form 3520 filings should be mailed to the Internal Revenue Service Centre, P.O. Box 409101, Odgen UT 84409.

DISCLAIMER: Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing a tax planning arrangement or taking an uncertain tax filing, position. Litwin CPA Inc. cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.

IRS will end the Offshore Voluntary Disclosure Program (OVPD) on September 28, 2018

The program was initiated in 2009 and allows U.S. taxpayers who previously did not report the offshore income and assets to voluntarily resolve the past non-compliance in exchange for a protection from criminal liability and a limit on civil penalty exposure.

According to the IRS, “while the program has been successful in the past, there has been a significant decline in the number of taxpayers participating as well as an increase in awareness of offshore tax and reporting obligations.”

IRS will continue offering the following disclosure options:

  • IRS-Criminal Investigation Voluntary Disclosure Program;
  • Streamlined Filing Compliance Procedures;
  • Delinquent FBAR submission procedures; and
  • Delinquent international information return submission procedures.

Tax credit for children’s activities 2017

Federal government eliminated the Children’s Fitness and Arts Tax Credits for 2017 and future tax years.
For Quebec:
You can claim a refundable tax credit for the physical activities or artistic, cultural or recreational activities of an eligible child, if:

  • You were resident in Québec on December 31, 2017.
  • Program/course lasted for at least 8 consecutive weeks or at least 5 consecutive days (in the case of a summer camp)
  • Your family income does not exceed $135,085 (line 275)
  • You have a receipt

 

Eligible child: who was born after December 31, 2000, but before January 1, 2012 → 6 to 18 y.o.

Tax credit is 20% of amount paid.
Maximum allowable is $500 * 20% = $100 per child.

Here is a link to Revenu Quebec’s website.