What Happens if You Don’t Report Cryptocurrency on Taxes?

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What Happens if You Don't Report Cryptocurrency on Taxes?
What Happens if You Don't Report Cryptocurrency on Taxes?

It is obvious that the IRS is actively tackling cryptocurrency tax avoidance. A John Doe Summons was recently sent to Kraken by the government, requesting that it locate any taxpayers who had engaged in a specified level of cryptocurrency activity.

If you don’t file your taxes, you could get into a lot of trouble. Because it is usually required by law for you to report income from cryptocurrency trades. The fact that there is a question concerning “virtual currency” on the first page of your tax return, as you may have already noticed, makes it plain that you must report your cryptocurrency activity.

You could be charged with interest, fines, or even criminal charges if you do not report transactions and are subject to an IRS audit. However, you still have time to file a tax amendment and lower your risk of being audited if you haven’t disclosed your Cryptocurrency on previous tax returns.

Read on to learn more about the consequences of failing to register your cryptocurrency assets as well as how to file a crypto tax amendment.

How Crypto Taxes Work

When traded or sold for a profit, cryptocurrency may be liable to capital gains taxes. Making a purchase, exchanging digital currency for cash, or even cashing out may all be taxable actions. The difference between your purchase price, also known as basis, and the value when selling or exchanging is a gain or loss, and your tax rates are based on how long you have owned the property.

Depending on your taxable income, you can be eligible for long-term capital gains rates of 0%, 15%, or 20% if you held digital assets for more than a year. According to a CNBC survey, however, many cryptocurrency investors sell or trade their holdings more regularly, resulting in short-term capital gains that are taxed at standard income tax rates, up to a maximum of 37 percent for high incomes.

This is What Happens if You Don’t Report Cryptocurrency on Your Taxes

There is no limit on how far back the IRS audit can go if they have grounds to suspect that you have committed tax fraud. Investors can be confronted with an audit and a tax bill they cannot pay years from now.

What happens if you sell lesser meme coins like SHIB and SAITAMA on smaller exchanges?. This may be the question you have at this time. In the future, even those smaller exchanges that didn’t intend to be taken seriously by you and the IRS would have to provide tax records to you. If and when that occurs, you can be subject to an IRS audit if you failed to timely file your tax returns and disclose your income. You can also be required to pay interest and penalties on top of the additional tax.

You might be unsure if the cryptocurrency activity you previously engaged in is even taxable. Generally speaking, the answer is “yes.” You must disclose any bitcoin trade you conducted over the past several years on your yearly tax return.

How Can the IRS Tell if You Own Cryptocurrency?

Many cryptocurrency investors are convinced that there is no way for the government to see or know that they are making money trading, buying, or selling cryptocurrency because of the anonymous, decentralised nature of blockchain and crypto transactions.

Blockchains are distributed public ledgers, thus it’s vital to remember that anyone can examine the ledger at any time. Associating a wallet address with a name is practically the only way to determine a person’s activities on that ledger.

Data matching is a technique the IRS uses to combat tax fraud. The organisation has already collaborated with service providers like Chainalysis to examine blockchain transactions and locate “anonymous” wallets.

What You Need to do to Fix the Neglect to Report Your Crypto Taxes

What should you do if you previously filed your tax return but failed to remember to disclose your cryptocurrency gains on it because you were unaware that you were required to do so? 

The best course of action is to amend your tax return for the year or years that you didn’t report your cryptocurrency trades.

You have three years from the time you filed your original return to file an amended one. The IRS is well known for being more forgiving to taxpayers who make a good-faith effort to pay their taxes on time.

Step 1: Calculate How Much You Owe

Finding out how much tax you owe might be challenging. You must be aware of your cryptocurrency’s fair market value at the time of each trade in order to accomplish this. This chore can easily become challenging for traders who have conducted hundreds, if not thousands, of trades throughout the years.

Crypto tax software can be useful if you find yourself in this predicament.

Step 2: Update Your Return

You should download the most recent version of IRS Form 1040X, Amended U.S. Individual Income Tax Return, once you have calculated your tax amount. You only need to input new or updated information, and the form includes simple instructions.

Step 3: Submit Your Updated Return by Mail or E-mail.

You can mail your amended tax return to the IRS once you’re done. Make sure all essential forms and supporting documents are attached before mailing. Additionally, you must submit the additional tax payment with the return if your change results in a larger tax bill.

After submitting your updated return, it’s necessary to wait. Amended returns typically take up to 16 weeks to process. After filing, it may take up to three weeks for it to appear in the IRS system. Unless the tool directly instructs you to call the IRS during that three-week period, you don’t need to. According to the IRS, the process may now take more than 20 weeks as a result of COVID-19 delays.

To Sum Up

Over the past few years, both the crypto market and the IRS’s enforcement activities have seen rapid growth. You may have endless frustration compiling your cryptocurrency transaction history and appropriately reporting them on the appropriate tax form. To comply with new tax legislation, you need to absolutely engage a trustworthy crypto tax professional.