By Anna Malazhavaya

Originally Published on Financial Independence Hub

For better or for worse, cryptocurrencies have gained popularity, at least in part, due to their anonymity. As the industry develops and tries to shake the “crypto-is-for-criminals” reputation from its early days, the anonymity in certain areas fades. Know Your Client requirements at crypto exchanges have become quite sophisticated. News reports keep appearing about popular crypto exchanges, such as Coinsquare in Canada and Coinbase in the United States, handing information about their account holders to local tax authorities.

The price of Bitcoin has more than tripled in the last four months. As lucky crypto investors consider whether to HODL (Hold On for Dear Life) or sell, they can be certain the taxman is watching. When can information about your crypto investments and earnings become available to the Canada Revenue Agency? Here are a few examples.

1) If you are audited, the CRA auditor can get access to your crypto exchange account

If you are audited by the CRA for any reason, the auditor may come across a crypto exchange purchase on your bank or credit card statement. If so, expect follow-up questions from the auditor. If the auditor asks about your assets, you must disclose all your assets, including your crypto portfolio. Lying to the CRA is never a good idea and can lead to criminal charges.

The CRA has the power to compel third parties, including currency exchanges, to disclose information related to your crypto account activity through a so-called Requirement for Information (“RFI”). If a crypto exchange receives such RFI, they must either comply with it, dispute it at the Federal Court, or face criminal charges. Most Canadian-based exchanges will promptly release your information to the CRA.

2) Even if you are not currently audited, the CRA may get access to your crypto exchange account as part of a so-called “unnamed persons” RFI

In some cases, the CRA can ask the Federal Court for an order to compel third parties to disclose information on a group of “unnamed persons” if the group is “ascertainable” and the purpose of the request is to verify the tax compliance of these taxpayers. A recent example of the CRA successfully exercising this power was a Federal Court order compelling Home Depot to disclose information about the accounts of its commercial customers. It appears that the CRA won’t hesitate to use this power when dealing with crypto exchanges.

In September of last year the CRA filed an application in Federal Court seeking an order to compel Coinsquare Ltd., a popular Toronto-based digital asset exchange, to disclose activity of its clients. All its clients. And all the way back to 2013, no less. Coinsquare disputed the application arguing that the group was not “ascertainable” and that the CRA engaged in a “fishing expedition” invading the taxpayers’ privacy.

On March 23, 2021, in its blog post, Coinsquare announced that it reached an agreement with the CRA for an order, whereby only a portion of accounts would be disclosed to the CRA on or before April 6, 2021. Coinsquare would produce to the CRA information on accounts valued at $20,000 CDN or more on December 31 in the years 2014 through 2020, along with 16,500 of the largest client accounts by trading volume during those periods.

3) Proceeds of Sale of Cryptocurrency can be visible to the CRA

Whether or not you used a popular crypto exchange platform to sell or spend your cryptocurrency, the CRA may question the source of proceeds (traditional currency or assets purchased with cryptocurrency) you received in exchange. If you are audited, your reported taxable income should be consistent with that large deposit in your bank account or that late-model Tesla parked in your driveway. If the CRA finds a discrepancy, the consequences can be very serious.

4) Crypto investments are only anonymous while your crypto address is not linked to your name. But if the CRA makes the connection, look out

Using the same crypto address for sending and receiving some types of cryptocurrency is like writing under the same pseudonym. If anyone ever connects your real identity to the pseudonym, all you ever published under the pseudonym will then be linked to you.

Similarly, one Bitcoin address can be linked to many transactions for the same person. If the CRA is successful in linking the address to one’s identity (through Know Your Client and Anti-Money Laundering policies at exchanges and blockchain analysis), they will gain access to all transactions pertaining to that address.

Granted, there are still ways to purchase and hold cryptocurrency anonymously, just as there are ways to anonymously hold and transact with cash. Complete anonymity often comes with added costs (Bitcoin ATMs), risks, or inconveniences. It may not be long before we see government regulations that outlaw anonymous ways to purchase and store cryptocurrency. It goes without saying, of course, that hiding or lying about the assets to the CRA is illegal. The CRA has vowed to employ the latest technology and the best blockchain experts available to combat tax evasion in the cryptocurrency sector.

So, what is next for Coinsquare account holders whose information was released to the CRA?

You will be alerted by Coinsquare if your account information was released to the CRA. If Coinsquare did not alert you, your account was not affected by the order. If you are one of the affected Coinsquare account holders, you may be contacted for a CRA audit shortly. What to do? Notify your tax advisor and with that person review your prior tax filings. If you did everything right, you should have nothing to worry about.

However, you should call your tax lawyer as soon as possible if any of the following applied to you during the period 2014-2020:

• You did not report your earnings from the sale of cryptocurrency;

• You reported all or some of the earnings, but you and/or your tax advisor are concerned about the accuracy of your tax filings;

• The cost of your crypto portfolio was over $100,000 CDN at any point of time and you did not file Form T1135.

Anything you share with you tax lawyer will be confidential and is subject to solicitor-client privilege. Your lawyer will consider whether or not the CRA’s voluntary disclosure program (“VDP”), the so-called “tax amnesty” program, is a suitable option for you. If the CRA accepts your VDP application, you may avoid penalties and criminal prosecution for non-compliance.

But your VDP application must be voluntary, which means you must submit it before, not after, the CRA comes knocking at your door. For some Coinsquare account holders, the time may be running out.

What if you are not one of the affected Coinsquare account holders, but you invest in cryptocurrency and may have compliance issues?

Whether or not you were affected by the Coinsquare order, the latest ruling at Federal Court is a sign of things to come. It is quite likely that the CRA will soon proceed to obtain similar “unnamed persons” RFI orders from other crypto exchanges. If you are concerned, now is the time to correct prior mistakes with your tax professional.