This article was written by John Liu, CPA, Senior Tax Director at SEGAL LLP, as part of the quarterly newsletter dedicated to Canadian news. This publication is produced by the Canadian member firms of the Moore North America network. This in-depth analysis of cryptocurrency taxation is part of our commitment to remain your trusted partner for success by keeping you informed of crucial developments in Canadian tax news.
Cryptocurrencies are commonly viewed as more private and anonymous alternatives to traditional financial investments, free from government oversight due to their decentralized nature. This perception poses a challenge to taxpayers’ willingness to self-report their crypto-asset transactions. However, we should not expect this anonymity to last. Upcoming regulations and ongoing Canada Revenue Agency (CRA) action to enforce tax compliance on crypto-assets owners will likely make it harder to dodge tax reporting.
While the CRA was initially late to address the taxation of crypto-assets, it eventually recognized the risk of non-compliance related to crypto-assets in its 2021 Overall Federal Tax Gap Report. Since then, the CRA has issued guidance on reporting crypto-assets and developed its ability to trace and gather information on cryptocurrencies. In 2021, the CRA successfully compelled the Canadian crypto exchange Coinsquare to provide information on its customers, which led to audit action against hundreds of taxpayers for undeclared crypto transactions identified using this data. This success set a precedent for the CRA to uncover more unreported crypto transactions through information requests to other crypto exchanges.
Moreover, the 2024 federal budget announced the planned implementation of the Crypto-Asset Reporting Framework (CARF), a set of regulations developed by the Organization for Economic Cooperation and Development (OECD) designed to require crypto-asset service providers to collect information on their users and provide it to tax authorities. When this is implemented, service providers in Canada – including exchanges, operators of crypto ATMs, and brokers – will have to provide details on customers and their crypto transactions, such as transfers of crypto-assets, purchases using crypto-assets, and exchanges between different crypto-assets or between crypto-assets and fiat currencies.
These rules are expected to take effect in Canada in 2026. The U.S., UK, and more than 40 other countries also plan to implement this reporting framework by 2027, facilitating automatic information exchange across all participating jurisdictions. Crypto transactions are notoriously difficult to track, especially with the rise of decentralized exchanges (DEX) using peer-to-peer systems without a central authority. Recognizing this, the CRA appears to be focused on monitoring the on and off ramps of the crypto ecosystem by requiring service providers to report potentially taxable transactions of users who buy into or cash out of the crypto ecosystem.
Current and upcoming tax reporting requirements
The U.S. is currently ahead of Canada in its tax reporting requirements. Starting in 2025, brokers must report crypto transactions on Form 1099-DA (similar to a T3 and T5 in Canada). In 2020, the IRS added a mandatory question to federal tax returns, asking if the taxpayer engaged in transactions involving digital assets. U.S. tax policies often influence their Canadian counterparts. In 2024, Québec tax returns added a similar mandatory question on whether the taxpayer held, acquired, or used crypto-assets, necessitating a separate crypto-asset return to be filed with the Québec tax return. With U.S. and Québec counterparts now directly addressing crypto-assets in tax returns, it would not be surprising if the CRA soon implements a similar mandatory question on a federal level.
Common tax-reporting pitfalls
Canadian tax legislation, as it stands, was not designed with crypto-assets in mind, which presents challenges from a tax reporting perspective. Taxable dispositions of crypto-assets do not only include exchanges between crypto and fiat currency, but also lesser-known transactions that could give taxpayers a nasty surprise. Examples include:
- Exchanges between different cryptocurrencies (e.g., swapping Ethereum for USDC)
- Purchases using cryptocurrencies (e.g., buying goods and services with Bitcoin or buying non-fungible tokens (NFTs) with Ethereum)
- Moving cryptocurrencies across different blockchains (e.g., converting Bitcoin to Wrapped Bitcoin on the Ethereum blockchain)
- Depositing crypto-assets to a centralized exchange and lending platform that has discretion to use those assets in the exchange’s own name without informing the taxpayer
- Depositing cryptocurrency into the liquidity pool of a decentralized finance (DeFi) platform in exchange for receipt tokens redeemable 1:1 for the underlying token
Taxable income may arise from lesser-known transactions such as:
- Earning cryptocurrency from mining, staking, lending, etc.
- Airdrops of crypto-assets, including cryptocurrencies and NFTs
- Earning cryptocurrency from gambling or gaming undertaken in pursuit of profit instead of recreation
T1135 reporting can be particularly troublesome for crypto-assets. There is a common misconception that cryptocurrencies are held within digital wallets. In reality, wallets generally contain only the public and private keys required to post entries for the wallet address to the public blockchain ledger. This makes determining the location of crypto-assets difficult, as a taxpayer could have several copies of their wallet key in flash drives held in multiple countries or stored online at an unknown server location (or several). The CRA has provided very little guidance on how to determine if crypto-assets are held outside of Canada, requiring disclosure on the T1135. The only relief provided to date was the CRA’s willingness not to consider crypto-assets held through a Canadian platform regulated by the Canadian Securities Administrators (CSA) as specified foreign property.
Ways to be compliant
As the CRA improves enforcement of tax reporting on crypto-assets, it is essential for crypto users to maintain adequate records of their crypto-asset activities and holdings and report them for tax purposes. When dealing with transactions that are complex or in areas with little guidance from the CRA, the accuracy of crypto tax software might be limited, and advice from a tax professional can help avoid future surprises.
Taxpayers with unreported crypto transactions or foreign crypto holdings have the opportunity to file under the Voluntary Disclosures Program (VDP) to correct past tax filing deficiencies. If accepted, the CRA may grant relief from prosecution, as well as relief from penalties and partial interest.
