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Ottawa is using crypto detectives to catch tax cheats

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The Canada Revenue Agency (CRA) has hired a company that’s cracked some of the world’s biggest cryptocurrency theft and money laundering cases to help it decide which cryptocurrency-holding taxpayers to audit.

The hiring of these crypto detectives comes as the CRA ramps up its enforcement of cryptocurrency-holding tax evaders, in cooperation with other countries.

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Talking Point

The Canada Revenue Agency is using blockchain compliance and investigation technology to help decide which cryptocurrency-related tax files to audit. The hiring of the two U.S.-based firms comes as the tax department is increasing enforcement of cryptocurrency-holding tax evaders.

The agency has a large target to chase. According to a Bank of Canada survey, five per cent of Canadians owned Bitcoin in 2017. The central bank estimated their holdings accounted for 11 per cent of the total value of the cryptocurrency in circulation at the time. Bitcoin’s total market cap was US$100 billion in early May.

Asked how much cryptocurrency the government has seized using blockchain software and services, Alexandre Igolkine, a CRA spokesperson, said the agency’s use of the technology is still in its early stages of implementation, and it is too soon to comment on its impact.

The agency also declined to identify who it has targeted using the crypto detective tools. But in March, Forbes reported that the CRA was looking into holders of Bitcoin and other tokens, and the agency said it had “over 60 active audits related to cryptocurrency.”

According to the CRA’s tax compliance guide, buying and selling goods and services with cryptocurrencies is subject to the same tax rules as barter transactions. Any gains or losses from exchanges that treat tokens as a commodity—investors playing the cryptocurrency market, for example—may be considered taxable income or capital.  

In January, the tax department began using Chainalysis and CipherTrace, two American blockchain compliance and investigation platforms, to help decide which cryptocurrency-related files to audit.

While the audits are currently focused on taxpayers who may not be complying with their tax obligations for cryptocurrency holdings or transactions, the agency has bigger hopes for blockchain enforcement. “The CRA’s original interest in Chainalysis was in its potential to identify digital currency holders and allow for the seizure of unpaid tax debt,” said Igolkine—including owings unrelated to token holdings. But the agency said it found that the platform can’t actually identify specific cryptocurrency holders; CipherTrace said it also does not provide that service.

Igolkine said token owners’ identities typically come out during a tax audit. “The CRA continues to monitor and assess the compliance value of various blockchain surveillance products in the context of their ability to detect cryptocurrency holders who have not met their tax obligations,” he said. “Chainalysis also assists in the tracing of cryptocurrency transactions and in establishing a comprehensive picture of taxpayers’ cryptocurrency activities.”

The CRA set up a cryptocurrency unit in 2017 “to research and monitor the risks associated with emerging developments in the use of digital currencies,” said Igolkine. It’s also seeking to catch crypto tax cheats through international cooperation. In July 2018, the agency and its equivalents in the U.S., the U.K., Australia and the Netherlands launched the Joint Chiefs of Global Tax Enforcement (J5), an information-sharing and joint operations group.

Johanne Charbonneau, director general of the CRA’s criminal investigations directorate, said the J5 will fight “serious international tax and financial crimes, money laundering, and cybercrime through the use of cryptocurrencies.”

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The CRA isn’t the only tax department that uses crypto detectives. The U.S. Internal Revenue Service issued Chainalysis around US$1.96 million in contracts and purchase orders in 2018, according to government data. In 2017, The Daily Beast reported that the agency was using the firm’s software to track bitcoins between users’ wallets until they cash out at a cryptocurrency exchange, which the government can subpoena for identifying information.

Chainalysis raised US$16 million in a Series A round in April 2018, and expanded its blockchain tracking from Bitcoin to other cryptocurrencies. The firm rose to prominence after leading the investigation into the 2014 theft of 850,000 bitcoins from Mt. Gox, the world’s largest Bitcoin exchange at the time. About 200,000 were eventually found. In 2017, police in the Netherlands used Chainalysis’s tools as part of an investigation that uncovered the operators of Hansa, a major dark web drug site.

Canadian law enforcement has also worked with the CRA’s two crypto detectives. The RCMP awarded Chainalysis two contracts for software and services worth a combined $98,679.74 in 2018. And, in February this year, CipherTrace CEO David Jevans testified as an expert witness for the Crown in an Ontario Superior Court case—a fact the company advertised with a press release.

Chainalysis did not respond to a request for comment. CipherTrace said it does not comment on specific companies or agencies, whether or not they are customers.