Ever since cryptocurrency investing was taken up by most investors and enthusiasts worldwide, the U.S. government has been working hard to adjust the corresponding tax laws to curb unfair profiting from bitcoin and other cryptocurrencies.
For instance, for taxing purposes, U.S. citizens who profit off crypto must report them as property rather than cash, regardless of their current place of residence. Failure to do so will lead to hefty fines and even criminal charges.
Let’s look at the potential penalties below!
The newest 1040 tax form immediately asks taxpayers to disclose their crypto activity if they have done any or all of the following:
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.
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.
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.
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.
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.
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.
Policy Advice is a website devoted to helping everyday people make, save, and grow money. While our team is comprised of personal finance pros with various areas of expertise, nothing can replace professional financial, tax, or legal advice.
Policy Advice is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.Policy Advice is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com
Stay In Touch
© Copyright 2022 PolicyAdvice.net. All rights reserved.