Pattie Lovett-Reid: CRA is watching cryptocurrency trades. Here's what you need to know

FILE - An advertisement of Bitcoin, one of the cryptocurrencies, is displayed on a building in Hong Kong, on Nov. 18, 2021. (AP Photo/Kin Cheung, File)

Digital currencies have taken the world by storm. Where Bitcoin has become a household name, others such as Ethereum, Litecoin, Polkadot and Dogecoin are all growing rapidly.

If you aren't trading in a digital currency, it is my bet you know someone who is. In fact, the popularity has grown to such an extent the Canada Revenue Agency is watching very closely.

Not only are they watching, they want their fair share of tax revenues and that means it could prove very costly if you fail to disclose.

Here is the most important thing you need to know: CRA doesn't consider cryptocurrency to be a currency at all, it is treated more like a commodity akin to gold and silver.

• What Canadians need to know before buying cryptocurrency

If you have been buying or selling cryptocurrencies this past year – whether trading, gifting, receiving or even making donations -- you need to understand the tax consequences. This is especially true if you are trading crypto like a commodity to turn a fast profit, because those types of transactions would be treated as business gains or losses.

Here is an example:

If you purchased $3,000 in Bitcoin and then sold it two months later for $15,000, that would be considered business income of $12,000. In that case, you would need to also include a business statement with their personal tax return.

If you under report or omit reporting that income, CRA could impose a penalty of $100 or 50 per cent of the understated taxes, whichever is greater. Of course, that’s in addition to the taxes owed.

If you purchase a digital currency for a long-term investment, any increase in value would be treated as a capital gain. However, any losses can only be used to offset gains you are reporting.

You might decide to roll the dice and hope to escape scrutiny. But you need to know, you just might get caught.

According to H&R Block, in 2021 the CRA won a court battle to obtain customer data from cryptocurrency trading platform Coinsquare, including the names and details of all active and inactive customer accounts. In addition, the CRA now co-ordinates exchanges in some capacity with others to track the movement of digital assets.

Simply owning cryptocurrencies isn't taxable; it all comes down to what you do with it. CRA is rapidly getting up to speed and utilizing the resources it needs to ensure you pay your fair share on money owed.

To be fair, this is likely a work in progress and just because you may not be audited this year, please don't assume you are getting a free pass. I would ensure my records are kept up to date and accurate, and all documentation is stored for six years after the tax year they relate to as this data could be requested at any time if you are audited.

If you find yourself in a position where you have been offside and have avoided paying tax, now might be the time to make a voluntary disclosure.

Like CRA, digital currencies are here to stay, so once again I will say it is better to be onside and above board, or the penalties could be onerous.