Principal Issues: [TaxInterpretations translation] Can the CRA provide guidelines to follow in the event that, due to circumstances beyond the taxpayer's control and in a short period of time, it is difficult, or even impossible, to obtain the documentation necessary to claim a cryptocurrency loss arising from an adventure in the nature of trade?
Reasons: Some additional documents.
FEDERAL TAX ROUNDTABLE, NOVEMBER 2, 2023
APFF CONFERENCE 2023
12. Cryptocurrency: Fraud and bankruptcy of a cryptocurrency platform
A major cryptocurrency exchange platform went bankrupt following a major fraud involving several billion dollars. For several months, a taxpayer had held an account into which money in US currency was deposited. This account was used to buy various cryptocurrencies on a daily basis, which were then bought and sold various times in the same day. The aim was to profit from the volatility of different cryptocurrencies. The taxpayer's account on the platform was in cash at all times at the end of the day.
The taxpayer's account was subject to the fraud, so that the taxpayer’s account was completely emptied and the platform was put into bankruptcy as soon as the fraud was announced.
All the documentation relating to the daily transactions was on the platform. As a result of the bankruptcy, the taxpayer no longer had access to information on the various transactions. Only a few months elapsed between the time the taxpayer opened an account on the platform and the bankruptcy. The taxpayer is able to prove that the money was deposited into the platform account, but cannot demonstrate all the different transactions carried out on a daily basis.
Question to the CRA
Can the CRA provide guidelines applicable to this type of situation where, due to circumstances beyond the taxpayer's control and in a short period of time, it is difficult, if not impossible, to obtain the documentation necessary to claim the loss arising from an adventure in the nature of trade?
CRA Response
A taxpayer who trades in cryptocurrencies must ensure that adequate records are kept. In order to do so, it is important that the taxpayer record and save, on a regular basis, the relevant documents and information regarding his cryptocurrency transactions as described on the CRA's webpage "Keeping a record of your cryptocurrency transactions" (footnote 1). [footnote: Extract from the Government of Canada's website: CANADA REVENUE AGENCY (online: Keeping a record of your cryptocurrency transactions - Canada.ca.)].
It is important to note that the tax consequences where a taxpayer is the victim of a fraud or scam can only be determined after a full review of all the facts and circumstances relevant to each situation.
In general, if an exchange ceases operations and the taxpayer is no longer able to access the necessary documentation and information, other documentation may help to demonstrate that the taxpayer had an account with the exchange, had a balance at the time the exchange ceased operations and/or suffered a loss. Although not an exhaustive list, those additional documents may include the following:
- Publicly available information regarding the fraud and/or bankruptcy of the exchange platform, such as articles in the media.
- Documents confirming the activation of the taxpayer's account with the exchange platform, such as "Know Your Client" documentation and any correspondence with the platform confirming account activation.
- Any contract signed between the taxpayer and the exchange platform.
- Documents supporting the commencement of the relationship between the taxpayer and the exchange platform, such as electronic transfers from the taxpayer's financial institution to the exchange platform (this includes bank statements to support the transfer of currency for use on the exchange platform).
- A copy of the claim for the amounts due filed with the exchange platform's trustee and any communication with the trustee acknowledging receipt of the claim and/or confirmation of the amounts due.
- Any proceedings initiated by the taxpayer to recover the amounts due, such as police reports and/or correspondence and documents showing that the taxpayer has initiated legal proceedings to recover the amounts due.
- In the event that the taxpayer carries on a business, documents demonstrating that any income and losses related to cryptocurrency transactions have already been declared for tax purposes.
- Documents demonstrating that the cryptocurrency held has not already been disposed of, such as tax return schedules showing that no capital gains or losses, or part thereof, have already been declared.
- Working papers demonstrating a precise calculation of the amount of the loss claimed.
- Any documentation relating to the recovery of amounts due or compensation to be received.
- Proof that the taxpayer has not sold his credit position to the exchange syndicate.
It is important to note that a document alone may not be sufficient to demonstrate that a taxpayer has suffered a loss.
Yara Barrak
November 2, 2023
2023-098293
Answer prepared in collaboration with:
Jason Ward, Manager
Stakeholder Relations and Technical Support Section
Digital Compliance and Audit Support Division
Compliance Programs Branch
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 Extract from the Government of Canada website: CANADA REVENUE AGENCY (online: Keep a record of your cryptocurrency transactions - Canada.ca.)