When Do You Have to Report Your Crypto Gains?
The newest 1040 tax form immediately asks taxpayers to disclose their crypto activity if they have done any or all of the following:
- They used crypto to buy something;
- They sold crypto in the previous year;
- They mined crypto;
- They traded one crypto for another.
Therefore, if you just purchased crypto with fiat currency and didn’t sell it or received it as a gift, you can answer ‘No’ on the question regarding virtual currencies.
What Happens If You Don't Report Your Bitcoin Gains?
All of the above taxable events must be reported to the IRS, or you will be guilty of tax fraud, such as tax evasion, under current laws. Moreover, the IRS views crypto as property that appreciates and depreciates, so you must report it along with your other capital assets. Failure to do so may lead to penalties similar to other property-related tax omissions.
Some taxpayers, especially U.S. expatriates living abroad, believe they can avoid detection if they don’t report their crypto dealings. However, in recent years, the IRS has increased its focus on crypto transactions and started acquiring data from popular crypto exchanges.
Therefore, hiding your crypto activity is inadvisable since the chances of being found out are very high. Moreover, there is no statute of limitations for tax fraud. Unfortunately, escaping punishment by feigning ignorance of the tax rules no longer works.
How Far Back Can the IRS Go When Auditing You?
If the IRS believes you are attempting to commit tax fraud, you will be audited, which may also happen if you are randomly selected based on a statistical formula.
Typically, the standard IRS lookback period is three years, but if the IRS auditor finds certain errors, they will extend the period for up to three additional years.
The process length will vary depending on the issue's complexity, how forthcoming you are, and whether you are submitting your information in person or by mail.
Should the audit reveal potentially fraudulent activity, the IRS will propose specific changes and request you to complete the applicable collection process. However, if you disagree with the findings, you can request an in-person conference or file an appeal.
What Is the Punishment for Not Reporting Your Crypto Gains?
The applicable tax fraud penalties range from increased interest to heavy fines and even jail time for taxpayers criminally charged for hiding huge sums in crypto gains.
First of all, crypto gains are subject to both the Income Tax and the Capital Gains Tax rules in the U.S., and violating these provisions results in standard tax evasion penalties: you will be fined 75% of the due tax or a maximum of $100,000. Moreover, you may also receive a maximum jail penalty of up to five years as you are committing a federal offense.
If you file a false tax return, instead of committing outright evasion, you may still be fined up to $100,000, but the maximum prison sentence is three years.
Finally, failing to file your tax return is considered a misdemeanor that does not lead to jail time, but the financial penalty is $25,000 for each missed year.
Note: The maximum fine for corporations hiding crypto gains is $500,000.
How Will the IRS Learn About Your Crypto Gains?
The IRS has started implementing more rigorous checking procedures regarding crypto gains in the last few years in an effort to stamp out the massive crypto tax fraud.
For instance, since 2017, the IRS has been issuing summons to popular cryptocurrency exchanges to hand over all data pertinent to U.S. taxpayers, resulting in the discovery of tens of thousands potential fraud cases. These brokers must also provide form 1099-B to the IRS, which details all your trades for the applicable tax year.
The IRS works with outside contractors as well, such as Chainalysis, to identify anonymous crypto wallets on all popular blockchains, such as Ethereum and Bitcoin.
Bottom Line
As you can see, despite being a new type of currency, gains from bitcoin and all other digital currencies must be reported on time with the relevant IRS forms, lest you invite unnecessary government attention and severe penalties. After all, evading crypto taxes is a federal offense that leads to significant fines and jail time. Hopefully, this article gave you all the info you needed regarding the taxing of your crypto profits.
