The ups and downs of the cryptocurrency sector may have transfixed the investment world over the past year, but if you are one of the lucky ones who made money on bitcoin or any of the other cryptocurrencies in 2017, you’ll need to declare those earnings — something which almost half of tech employees surveyed are saying they probably won’t do.
Anonymity has been an oft-promoted feature of virtual currencies, which use distributed ledgers to validate transactions rather than central authorities such as governments and banks. But while that decentralized system of accounting may be revolutionizing the fintech sector, it won’t keep you from getting in hot water with the IRS in the United States or the CRA in Canada, as both have deemed cryptocurrencies a form of property or commodity, with gains and losses to be reported on your tax returns.
Recently, a US-based tech worker social app and online community called Blind surveyed more than 2,600 of its users who said they had earned money from cryptocurrencies during 2017, finding that a full 46 per cent of them were not planning on reporting those gains on their taxes this year.
“The IRS is increasing their focus on targeting people who do not report earnings from cryptocurrency on their taxes,” says Blind in a blog post. “Still, a high percentage of Americans who invested in crypto are willing to take this risk.”
This past December, Bank of Canada governor Stephen Poloz spoke on the topic, warning Canadians that the tax implications of investing in virtual currencies are very real.
“Characteristics vary widely but, generally speaking, they can be thought of as securities. The Canada Revenue Agency agrees,” said Poloz. “That means, if you buy and sell them at a profit, you have income that needs to be reported for tax purposes.”
Not only are cryptocurrencies equated to property, transactions involving them have been deemed by the CRA as a form of bartering and thus they may be subject to GST/HST, as well. “This means that as far as the CRA is concerned, if you bought software with cryptocurrency, it's like trading a chicken for grain and both the chicken and the grain are subject to GST/HST,” says tax lawyer Kathryn Walker to the Globe and Mail.
Walker says that the anonymity afforded by some cryptocurrencies is immaterial, since once those gains made are transferred into real cash —by selling your bitcoin, for example— you can be taxed.
“Once consumers purchase cryptocurrency, it is held in their virtual wallet, which is essentially just software,” Walker says. “To date in Canada, it is possible that people's relationship to their wallet need never be unmasked. It’s like going on a dating app, creating a profile and flirting unabashedly. No one needs to know it's you.”
“Well, that works well enough until you want something real,” she says. “As soon as you want a real date, or real money, the mask comes off. While you can keep your cryptocurrency in the virtual world and never identify yourself as its true owner, the moment your cryptocurrency hits the ground, when you buy something or cash out, the jig is up.”