There is a quote that I've heard that "Nothing is certain except death and taxes. But I'm not so sure about death".
Of course that is a tongue in cheek way of saying that taxes are the one universal in life.
I'm not sure I'd subscribe to that viewpoint as there may actually be ways to circumvent taxes for the truly inventive. However, if you try to avoid taxes I'm pretty sure that there is no country and no government that won't go after those who try to avoid taxes....and with good reason. Those tax dollars pay for so many things in a country. Infrastructure to support the cities. Police, Firemen, Teachers and civil servants to support the population Courts, social programs, and even things like passport offices wouldn't exist without the government and the taxes that support it.
However, many people still try to get around paying taxes. Indeed in Canada it seems like a national passtime is trying to figure out the best way to pay the least taxes.
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The Shadow Economy
In Canada there is a very real idea of "The Shadow Economy". More or less what it means is transactions that the government doesn't see to avoid taxation.
The government is very good at taxing every good sold, every service rendered, and ever dollar made. If you work the government will watch and tax every dollar you make. If you buy something or sell something its the same thing.
But what if they don't see the transaction?
The government can watch credit card transactions. They can watch debit card transactions. They can watch cash flow into bank accounts. Cash transactions can sometimes go unnoticed and barter transactions are very hard to watch.
So... If a plumber comes to my house to fix my plumbing he is legally required to charge me tax on his service.
Assuming his bill is $300 a few things will happen.
- He will have to declare $300 in income which he will pay income tax on
- He will have to declare a service rendered of $300 and charge a service tax of 5% to the federal government and 7% to the provicial government so I'll have to pay an additional $36 in taxes
- The plumber will get tax deductions for equipment needed to provide the service
- I will get tax deductions for the amount paid if I'm renting out my property, but have to pay taxes on the rent collected.
In short, there is a lot of accounting needed to keep the government happy.
But let's assume that I paid $300 in cash? How will the government know about the transaction? Here's what happens then.
- The plumber puts the cash in his wallet and doesn't tell the government so no income tax for him.
- He doesn't charge me the federal or provincial taxes so I pay less.
The plumber makes more and I pay less
Of course if I use a credit or debit card to pay then the government can see the transaction and there will be big problems for the plumber. So, no hiding when using a "visible" method of payment.
Also, if a plumber tries to work "cash only" and doesn't make any visible income for a year the government will start looking at the bank account closely and again the plumber will have some explaining to do!
Hiding transactions with cash happens. That's what the *shadow economy is and its a cat and mouse game between people and the government.
Cryptocurrency and the Shadow Economy
Now for everyday people who make small transactions the government realizes that they can't catch everything. A side job here or there they know they won't catch. Selling a few vegetables from your garden on Facebook marketplace again they know they won't catch it. To the government its a cost of doing business and not worth their time and effort to catch.
However, when it is done on a large scale they will actively look for ways to catch the cheaters. Criminal activity of course is best known for this. Drug dealers who make HUGE amounts of money in cash don't pay any taxes but those huge amounts of money have to go somewhere. Large deposits into bank accounts or large amounts of cash moving across borders have to be reported. Don't report and all the money can be confiscated! This of course leads to money laundering which is a topic all in itself. Still, on a large scale money laundering for illegal cash is a big concern for governments. They want to collect their taxes!
Legalization of Marijuana
If the amount gets too large the government takes more drastic measures to collect their cash. It wasn't too long ago that the Canadian government legalized marijuana. Why did they do this? Taxes With criminal organizations controlling the trade of marijuana, making a LOT of money, paying no taxes and using that money to fund other illegal activities. The government looked at the issue and said "lets make it legal"...less money for criminals and more taxes for us.
Is it good for society? Is legalization the way to go? I have my opinions but in the end I'll say that both sides of the decision have their merits. I'm getting off topic though. The main gist of this post is about another potential loss of revenue that the Canadian government doesn't want to ignore which is....
Cryptocurrency
Now the Canadian government issues Canadian money and watches Canadian money transactions. Everything bought or sold in the country revolves around the Canadian currency. That means that the government can watch and tax everything. No other currency is legal tender and while businesses are allowed to accept other forms of currency they must convert and report in Canadian dollar.
But what if people decide they don't want to use the Canadian dollar?
The government is running a huge deficit. Those deficits could lead to devaluation of the currency (which is kind of like a hidden tax but again that's a discussion for another article). If there is another easy currency for making transactions like say : Bitcoin, Ethereum, Hive or any other crypto why wouldn't people just use it?
The government would have a much harder time watching the transactions. Cryptocurrencies can be sent across borders easily.
The government can't freeze crypto bank accounts. They can watch them and they can block their conversion to fiat currency in the country but actually freezing the account? Nope. The government can't do that.
Criminals using crypto to move money from country to country. Keeping their value neatly hidden from the government. Avoid taxes along the way. It's a scenario to give governments nightmares.
Which of course means that governments want to regular crypto!
Government regulation in Canada
What should the government do about crypto?
Some countries (here's looking at you China) take the stance of just banning it. Not legal, can't have it, your a criminal for using it.
Unfortunately such a hard line approach just encourages people to keep it hidden and makes criminals of everyday people.
Other countries make it fully legal. Like El Salvador. If you turn it to a true currency of the country then you give your people the ability to have a valuable currency which they can use to make digital transactions and payments easily. If legal then you can encourage fair reporting and taxation. People and government both win on the taxation side.
Unfortunatey it takes sovereign control of the countries money away from the government. No longer can the government just issue as much money as they want to fund whatever programs they want to bribe the population with.
The Canadian Solution
In Canada cryptocurrencies are seen as a commodity and using them to purchase something is seen as a non-cash transaction or "barter" transaction.
They have also declared that these barter transactions must still settle in Canadian dollar equivalents and must be reported like any other sales transaction with taxes paid accordingly.
In addition Canada has legislated that those people who wish to hold cryptocurrencies must keep track of all of their wallet ID's. They must track the value of every transaction in the wallet in Canadian dollars. They must pay capital gain tax on any amount made from the sale of those cryptocurrencies. Of course that also means a person can claim a tax deduction on losses incurred from their sale as well.
In essence the government says "You can buy and sell cryptocurrency just like buying and selling gold, silver, real-estate or any other item". However, you have to track your investment, tell the government about the purchase, and pay taxes if you make money on it. Also you have to pay taxes if you use it to buy or sell something just as if you were using Canadian dollars.
It is nice that Cryptocurrency is perfectly legal in Canada.
It is not nice that the government took an easy transaction online and made it an accounting nightmare!
How do I navigate the cryptocurrency scene
Now I've been in the cryptocurrency scene since before the Canadian government officially acknowledged it. I was one of those people mining before there were rules. With no rules people often thought it was just "free money" not seen by or cared about by the government.
However, I believe in being honest and up front in all dealings. That includes dealings with the government. When I was a miner I treated it like a business. I kept receipts for all the equipment I bought. I kept receipts for all the expenses for electricitiy, renting space for the units, the internet to keep them connected and more. I also kept track of all the payouts from my mining efforts. Then even before I was required to report them on my taxes I dutifully paid taxes on the profits I made.
A few years later when the government actually drew up guidelines and rules I was actually a little relieved. The thought of having to try and explain my business expenses to a government official who knew nothing about cryptocurrency seemed like an unpleasant task to say the least. With actual rules it makes life much easier and not.
The reason is on somewhere like Hive I make note of how much I invest into the cryptocurrency. I also make note of how much profit I take out and dutifully report that to the government. However, the government wants a ledger of ALL the purchases and sales of crypto. Could you imagine the ledger of all transactions on Hive? Every upvote would be a transaction. Every post. Every interest payment. Every tip. When I check Actifit it says I have over 12,000 notifications in the past year and the majority of those are tiny payments! The majority of those payments are tiny of perhaps 0.01 Hive or about 0.4 cents Canadian. Since the lowest form of currency here is 1 cent then they doesn't even register. However, 12,000 tiny payments that don't actuall register do make up something which does.
So, I take a more pragmatic approach. If the government wants to audit my books and look at the thousands upon thousands of tiny transactions they are welcome to. Audit me if they want but some poor government official will be spending way more time that its worth to look at fractions of a penny. I dutifully report how much I invested and how much I gained (or lost). I pay my fair share of taxes on it and rest easy knowing that if I ever get audited I've been honest in my dealings.
Sure I could try to alter the numbers and hide my earnings but why risk a nights sleep worrying about an audit?
Sure I could follow the letter of the law and document every single transaction but why spend hours of my life documenting fractions of a penny?
How do I come out on top from Cryptocurrency? I just enjoy the platform. Promote it where I can. Make a little bit of money and maybe spread a little to deserving people wherever in the world they may be. In case of emergency while travelling I even know I can use a crypto exchange anywhere to access my money. After enjoying the Hive infrastructure I then rest in the knowledge that I'm following the spirit of the Canadian laws by paying a fair share....plus or minus a few pennies for rounding error 😉
Playing the system
Of course I learn the rules exactly. The electricity for my computer : Tax deduction. A portion of my internet bill : Tax deduction. A portion of my mortgage payment : Tax deduction. The government sets the rules and I play by them exactly. I'll pay my fair share of taxes and take every legal means to make sure I don't pay anything more than I have to.
Others may take a different approach, but that's what works of me. I'm also not a financial advisor, accountant, or legal expert so please do your own due diligence for your own situation 😝
As always I'd love to get opinions and feedback.
I love hearing from the community 😁