The IRS is increasing scrutiny on unreported crypto. The agency has announced plans to focus more on crypto transactions during audits, and in recent years, the IRS has also summoned user information from many crypto exchange platforms.
The bottom line is that even though there is a lot of privacy around crypto transactions, the IRS will find out if you have taxable crypto transactions. If you don’t report them, you stand to incur penalties and potentially even criminal charges.
Unsure if you’re supposed to report your crypto and worried about unreported crypto transactions? Then, contact us for help today, or keep reading to get an overview of the requirements and learn what happens if you don’t report crypto transactions correctly.
Crypto Reporting Requirements: Capital Gains and Losses
The following types of transactions are taxable events that should be reported on your income tax return:
- Selling: If you sell crypto for U.S. dollars or any other currency, you must report your gain on your tax return. That’s the difference between the price you paid for the crypto and the amount you sold it for.
- Trading: If you trade one type of crypto for a different kind of crypto, you also have to report any gain that you earned from the time you acquired the crypto to the time you traded it.
- Using: If you use crypto to purchase goods or services, you must report a gain if the crypto is worth more on the day you use it than it was on the day you acquired it.
All of the above scenarios are situations where you must report a capital gain from the use of crypto, but if you incur a loss in any of those types of situations, you can use the loss to reduce your gain.
Here’s an example. Say you bought crypto for $10,000, you held onto it for a while, and then you used it to buy something. At that point, the crypto was worth $12,000. That means you must report a $2,000 gain.
Now, imagine that a friend gave you crypto as a gift, and it was worth $800 (and the friend paid $800 for it). A few weeks later, you trade the crypto for a different type of crypto, but since its value has fallen, you only get $600 worth of the new crypto. As a result, you have a $200 loss.
If these are your only crypto transactions during the year, you should report the $2,000 gain and the $200 loss. Now, you have $1,800 in capital gains. You report crypto transactions with other capital gains/losses on Form 8949 with your income tax return.
Reporting Crypto Received as Income
If you receive crypto during your business, you must report the crypto as income. Use the crypto’s fair market value on the day you received it, and simply report it with the rest of your income. For example, if you’re a sole proprietor, you’ll just report the income as revenue on your Schedule C, but if you have a partnership or a corporation, you’ll report the crypto with the rest of your business revenue on Form 1065 or 1120, respectively.
You don’t have to break out the crypto. You just report it with the rest of your revenue. To give you a simple example, imagine that you earned $100,000 USD from clients for graphic design work and received $12,000 worth of crypto from a couple of clients. You have $112,000 in revenue.
Now, once you collect the crypto and use it, you’ll have a capital gain or loss as described above. Again, you simply calculate the gain or loss by looking at the difference in the crypto value on the day you used it versus the day you received it.
Sometimes, crypto is income, even if you don’t receive it during the course of your business. That happens if you receive an airdrop or if you mine crypto. In both cases, report the value of the crypto as other income on your tax return. If mining crypto is your business, report it with your business income on your business tax return.
How is Cryptocurrency Taxed
Crypto received as income is taxed as income and may incur self-employment tax and income tax depending on the situation. Crypto that leads to a capital gain is taxed as a long-term capital gain if you have held the crypto for at least a year, and it’s a short-term gain if you held the crypto for less than a year.
Long-term gains qualify for a reduced capital gain tax rate and may even be taxed at 0% if your income falls below a certain threshold. Short-term gains are taxed at your income tax rate. You can claim crypto losses up to the value of your crypto gains, and you can use up to $3000 ($1500 for married filing separately) in crypto losses against your regular income. If you have additional losses, you may be able to roll them forward and claim them against gains in future years.
Misconceptions About Reporting Requirements
Crypto is so new that people have all kinds of misunderstandings of the IRS’ reporting rules. Here’s the truth behind some of the most pervasive misconceptions.
- Myth: You don’t have to report crypto if you don’t receive a 1099—If you have any of the above transactions, you must report the crypto, whether you receive a 1099 or not.
- Myth: Small gains aren’t taxable—All gains are taxable. Even if it’s a small amount of money and even if you qualify for the 0% tax rate, the transaction must legally be reported on your tax return if you’re required to file.
- Myth: You have to report all crypto that you have—Generally, you only have to report crypto dispositions and crypto received as income. If you buy crypto or receive it as a gift, you don’t have anything to report until you use, sell, or otherwise dispose of the crypto.
- Myth: Hard forks are taxable events—On their own, hard forks aren’t taxable. But if you receive an airdrop of new currency after the hard fork, the airdrop is taxable income based on its fair market value on the day of reception. Report this income as other income on your 1040.
- Myth: Mined crypto is not taxed—If you mine crypto, you should report the crypto you get as income on your tax return.
If you have questions or concerns, you should contact a tax attorney or CPA who can guide you in the right direction.
What if You Don’t Report Cryptocurrency on Your Taxes?
Now that you know what you need to report, you’re probably wondering what happens if you don’t include these details on your tax return. You may face penalties for unreported income if you don’t report crypto correctly on your taxes.
If you have a significant understatement of income, the IRS can assess an accuracy-related penalty that’s generally 20% of the underreported tax, but it can get up to 40% in some cases. If the IRS believes that fraud was involved, you may face a civil penalty of 75%. In rare cases, you can face criminal fraud charges.
In the best-case scenario, if you’re only dealing with a small amount of unreported income, the IRS may apply a late filing or late payment penalty of 5% or .5 % per month, respectively.
In all cases, the IRS will also backdate interest on the underreported tax to the day that the tax was due.
For example, say that the IRS discovers that you had $80,000 in unreported crypto gains and you owed $12,000 in capital gains tax. Because this is a significant amount of money, the IRS may add the 20% accuracy-related penalty. That increases the tax liability from $12,000 to $14,400, and interest gets added to that total starting from the day the tax return was originally due.
How Does the IRS Know if I Didn’t Report Crypto?
The IRS uses computers to compare taxpayer’s returns to info received from third parties. Thus, if the IRS receives a 1099 from a crypto exchange, its computers will notice if you didn’t report that info. The IRS can also find crypto transactions by auditing your financial records and tax returns.
How to Deal With Unreported Cryptocurrency
So, what should you do if you realize that you had a crypto transaction that you should have reported but didn’t? Well, if it’s a relatively small amount of money or if you just made a mistake, you can usually fix the problem by filing an amended tax return.
Use Form 1040X to amend your personal income tax return. If you didn’t report crypto received as income in your business, you could just file an amended version of whichever business tax return you file (for example, Schedule C with Form 1040, Form 1065, or Form 1120).
What if You Attempted to Evade Crypto Taxes?
Suppose you didn’t report the crypto in an attempt to evade the tax you owe. In that case, you may have acted fraudulently, and rather than amending your old tax returns, you may need to make a disclosure through the IRS Voluntary Disclosure Program.
The Voluntary Disclosure Program
The Voluntary Disclosure Program allows people who acted willfully in not complying with tax laws to minimize criminal exposure if they come forward voluntarily. To put it in plain English, if you fess up to the IRS, they will generally not pursue charges against you as long as you report all of the missing income and fully cooperate. The Criminal Investigation Unit reviews your disclosure and decides whether or not to accept your disclosure.
You should always consult with a tax attorney before making a voluntary disclosure. The attorney can help you decide if you even need to use this program—in some cases, they may recommend a “back door disclosure” via amending your returns. If they do recommend this program, they can help you with the disclosure and figure out the best way for you to deal with your unreported crypto. Make sure you pick an attorney who has experience with crypto cases.
Get Help With Unreported Crypto Now
Cryptocurrency has created a lot of excitement and interesting waves in the world of currency, and it’s also made a lot of money for many people. Whenever people are making money, the IRS wants a slice of that income, and that’s why the agency is cracking down on crypto.
Don’t risk criminal exposure, failing audits, penalties, or other consequences. Instead, get help today. To learn more about dealing with unreported crypto, contact us today at (404) 233-9800 or fill out our consultation form to find out how our team of expert tax attorneys can help you get back on track with the IRS.