Cryptocurrency audits are investigations into blockchain based cryptocurrencies performed on individual investors or cryptocurrency businesses. A cryptocurrency audit can be triggered by assumed unreported earnings or gains made on crypto assets that have gone undeclared. A common example would be an individual investor, whose centralized exchange records confirmed trades and gains which were not reported to CRA by the investor.
How Does CRA conduct a Cryptocurrency Audit
Before performing an audit, CRA must inform the investor or business in question about the upcoming audit. CRA will also inform them about the information they will require, such as which years will be audited and what the audit is about.
CRAs cryptocurrency audit questionnaire is quite thorough, including over 50 questions such as:
- Types of cryptocurrency purchased and sold
- Exchanges or wallets used
- Origin of funds used to buy crypto
- Any ICO participation
- Participation in passive income generating activities, such as staking
The list of questions for the potential auditee is extremely extensive.
Key Sources of Information for CRA Auditors
- Information From The Blockchain
As the blockchain never hides any transactions and is trustless and permissionless, all transactions happening are available for anyone to see, which makes them great sources of information for Auditors, as long as they can verify the wallets attached to each transaction are known to be held by the auditee.
There are concerns relating to blockchain information as each blockchain differs from the next, and each software used to harvest information from the blockchain can grant varying results.
- The Auditees Own Records & Bank-Account statements
Along with the questionnaire, auditees must turn over bank-account statements for verification. Assumingly, statements from wallets they own are also required to be passed to CRA to verify blockchain transactions.
- Any cryptocurrency addresses are handed over
- Addresses of any interactions had with other parties
This information will help verify the ownership of digital assets as cryptocurrency revolves around decentralized and anonymous activity, making it a much harder space to audit than regular industries.
CRAs requirements from auditees include complete transaction records, wallet addresses, exchanges used and bank accounts. These are crucial pieces of information to complete a swift crypto audit.
Most importantly, following CRAs guidelines for crypto taxation, especially if you or your businesses is registered on a central exchange with Know Your Customer protocols (KYC) will reduce possibilities of a surprise audit from the CRA.
- Declare your cryptocurrency income and gains each year
- Keep your records up to date using crypto-specific software
Not all audits are done under the assumption that an investor or a crypto business is evading taxes. Knowing they are complying will give them peace of mind in case they do get audited by CRA as they get a better grasp over the regulation of crypto assets.
Audits on small individual investors are as likely as audits on large crypto businesses as CRA tries to get a hold of the industry over the next couple of years. Participants operating within the cryptosphere should be aware they will most likely face an audit at least once in their lifetime as CRA begins to crackdown on those avoiding their taxes.
To be safe, CRA recommends you keep all records of your transactions and trades and follow their guidelines on correctly paying your cryptocurrency taxes.A recommendation would be to periodically download your crypto transactions from exchanges and save them in your private drives. This is because sometimes exchanges delete old data without investors knowling.
Disclaimer: CRAs relationship with Cryptocurrency
Although CRA continues to slowly create guidelines for Canadians investing in cryptocurrency, they are still way behind other developed countries when it comes to the rules surrounding taxation. Many DeFi protocols, such as yield farming and staking are yet to receive proper guidance from CRA. We should expect to see the guidelines rapidly increase as Canadian investors call for them but until then, we have to work with what is available.
*Opinions are for discussion purposes only. This does not represent the views of MetaCounts Cashflow Inc. or its affiliates. Furthermore, this does not constitute legal, accounting, or tax advice of any kind and should not be relied upon as such.