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Foreign property tax implications associated with owning cryptocurrencies

Financial Post | Jamie Golombek | Oct 14, 2021

Crypto taxes - Foreign property tax implications associated with owning cryptocurrenciesWhere, exactly, is your cryptocurrency located? It's complicated

If you hold foreign property whose total cost exceeds $100,000 at any point in a tax year, you’re required to file Form T1135. The form covers the obvious things, such as your Swiss bank account or Cayman offshore investment portfolio, but it’s also required for foreign stocks, such as Apple Inc., Microsoft Corp. or Google owner Alphabet Inc., that are held in a Canadian, non-registered brokerage account.

The penalty for filing late is $25 per day to a maximum of $2,500, plus arrears interest. There have been at least 20 reported cases in which taxpayers have been assessed a late-filing penalty since the 1998 introduction of Form T1135.

Is cryptocurrency considered foreign property?

Those questions were discussed in a recent article by William Musani and Ashvin Singh of Felesky Flynn LLP, a boutique tax law firm with offices in Alberta and Saskatchewan. They analyzed whether cryptocurrency falls under the technical definition of “specified foreign property” in the Income Tax Act, which includes “intangible property situated, deposited, or held outside Canada that is not used or held exclusively in the course of carrying on an active business of the taxpayer.”

Back in 2015, the CRA stated that “digital currency would be funds or intangible property and would be specified foreign property of a person or partnership to the extent that it is situated, deposited or held outside of Canada.”

See:  Proposed Amendments to the GST/HST Treatment of Cryptocurrencies

But where, exactly, is your cryptocurrency located?

In practice, an entitlement to your cryptocurrency exists in the form of a digital ledger on the related blockchain. But because it’s stored on a blockchain, it can simultaneously exist in several geographic locations.

These digital ledgers are considered both “distributed” and “decentralized” databases. The database that records the entitlements of a cryptocurrency holder is stored and updated in many locations at once — that is, distributed — which makes it difficult, if not impossible, to manipulate its records. The ledgers are also decentralized, since no single distributed database is the sole source of the true ownership of the particular cryptocurrency.

The article’s authors argue that in relation to the location of your cryptocurrency holdings:

The geographic location of your private key is “arguably the most relevant factor in determining where such cryptocurrency is situated, deposited, or held for the purposes of the act.”

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But the answer to this may depend on whether you are using a “hot” or “cold” digital wallet. Hot wallets are digital wallets connected to the internet, which is how nearly all cryptocurrency exchanges or online providers store your cryptocurrency.

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