Cryptocurrency investors have seen massive gains in recent years. However, many investors fail to properly report these gains on their taxes. Unreported crypto gains and losses accurately can lead to serious consequences with the IRS.
Crypto Gains are Taxable Events
It’s important to understand that any realized gains from cryptocurrency investments must be reported to the IRS. This includes:
– Selling cryptocurrency at a profit
– Trading one crypto for another (i.e. Bitcoin for Ethereum)
– Using crypto to buy goods and services
– Receiving crypto as income
Simply holding crypto as an investment does not trigger a taxable event. Taxes are only owed when a crypto position is closed for profit.
How Unreported Crypto Gains Impact Taxes
Not reporting crypto gains when cashing out has several implications:
- Inaccurate taxable income – Leaving off capital gains increases taxable income owed to the IRS. This can result in underpayment of income taxes.
- Missed capital gains taxes – Crypto gains fall under capital gains tax rates. Not reporting means you fail to pay capital gains tax on profits.
- Red flags for audit – Large discrepancies between reported income and crypto transactions increase audit risk with the IRS.
- Harsher penalties – Intentionally hiding crypto income can lead to stiff penalties of 20-40% on top of taxes owed.
Tracking Transactions is Key
The main reason investors fail to report crypto gains is poor record keeping. With exchanges, DeFi platforms, wallets, and more, tracking every taxable event can be challenging.
Using a crypto tax prep service can help aggregate all transaction data in one place. These platforms integrate with exchanges to track cost basis and detect taxable events. This streamlines reporting and provides an audit trail.
Amending Past Returns
If you failed to report past crypto gains, it’s best to amend previous tax returns. The IRS offers a voluntary disclosure program which can reduce penalties. Simply filing amended returns does not guarantee immunity from penalties, but demonstrates good faith.
For significant unreported gains, it may be wise to consult a tax accountant, attorney or CPA for guidance on amending returns. They can help develop a disclosure strategy to minimize IRS penalties.
Conclusion
With the IRS increasing enforcement on cryptocurrency tax reporting, investors must properly disclose their gains and losses. Failure to report crypto transactions accurately can expose you to penalties, interest charges, and increased audit risk. Using tax calculation tools can help you gather the necessary records to avoid these outcomes and sleep better knowing you are fully compliant.
