Cryptocurrency has become a global hot trend to increase personal wealth. In the US, the Internal Revenue Service (IRS) has made it clear to report each crypto gain made along with individual income. It doesn’t matter if the gain is made inside or outside the US; not reporting about it on taxes might create problems.
Will it land you in jail or cost you penalties and fines? Yes, you might have to deal with these if you do not report your cryptocurrency on your taxes. In this guide, we will learn the consequences of not reporting crypto, how the IRS tracks cryptocurrency transactions and the penalties you might have to face for any illegal move in this process.
What Happens If I Don’t Report Crypto On My Taxes?
The IRS is quite capable of confirming if you reported your cryptocurrency on your taxes or not. Therefore, risking it is not an option. Tax fraud and tax evasion are federal offenses, resulting in the fines charged by the IRS being as saturated as possible.
The IRS can charge up to 75% of the tax due, depending on the intensity of the case. This means a maximum penalty of $100,000 for individuals and $500,000 for companies. It can also cost up to five years of prison for the tax evader.
Understanding Cryptocurrency Tax Evasion
The IRS mentions two types of crypto tax evasions:
- Evasion of assessment: This is willful omission or underreporting of income by a taxpayer.
- Evasion of payment: When taxpayers hide assets or money to avoid paying their tax obligation.
Evasion of assessment
Evasion of assessment means not paying the right amount of taxes, which is usually the more common type of crypto tax evasion. This is when a person purposely leaves out a portion of their income, doesn’t report it or says they have more deductions than they actually do. Examples of evasion of assessment can include:
- Not telling the government about any extra money you earned in cryptocurrency.
- Not reporting the money you get as wages in cryptocurrency.
- Saying you made less money than you actually did from selling or getting rid of cryptocurrency.
- Not telling the government about the money you make from your business in cryptocurrency.
- Not telling the government about the money you make from selling or getting rid of cryptocurrency.
Evasion of payment
Suppose the government calculates how much the individual owes but the person hides their money or assets that could be used to cover their tax bill. This is termed as evasion of payment.
Does The IRS Track Cryptocurrency Transactions?
The IRS can easily track cryptocurrency transactions using various tools. Through this, thousands of crypto investors have received letters that state the amounts due in taxes related to crypto activities.
If you ever find yourself receiving one of these letters from the IRS, make sure to consult a crypto tax Certified Public Accountant (CPA). It will ensure you are compliant going forward, by helping you determine how much you need to pay.
Do all cryptocurrency exchanges submit IRS reports?
According to a recently passed law, all US-based exchanges are required to provide tax reports to the IRS and their clients. Exchanges operating in the US may also need to provide information about their users to regulatory bodies, such as the IRS.
What Are The Potential Penalties For Not Reporting Cryptocurrency On Taxes?
As mentioned earlier, the IRS can easily find out if you reported the cryptocurrency gain on your tax. The potential penalty for not reporting cryptocurrency on taxes depends on the need to document the correct forms for crypto and for making mistakes on your tax return regarding digital assets.
Individual investors who fail to report cryptocurrency on taxes must pay a fine of around $100,000 and $500,000 for the corporations. Imprisonment for five years is also one of the penalties that the IRS may levy.
Where Can I Find More Information About Reporting Cryptocurrency On Taxes?
The IRS provides official guidance for reporting cryptocurrency on taxes in the United States. Here are some essential resources from the IRS that can help you understand the tax implications of cryptocurrency transactions:
- The official IRS guidance on virtual currency provides information on how cryptocurrency transactions should be treated for federal tax purposes. The complete guide can be found on the IRS website.
- IRS Publication 544 also details how to report capital gains and losses from cryptocurrency transactions.
- To report capital gains and losses from cryptocurrency transactions, you typically use Form 8949. This form is then attached to your individual income tax return. You can find this form and all the instructions on the IRS website.
- Cryptocurrency transactions are reported on your income tax return. Make sure to accurately report your income, including any capital gains or losses from cryptocurrency transactions.
- Consider consulting with a tax professional or using cryptocurrency tax software that integrates with popular exchanges. These tools can help streamline the calculation and reporting of your cryptocurrency transactions.
Conclusion
Making money by investing in crypto and not reporting it could cost you a lot! Remember that the IRS has all the tools to track this down. The penalty that you end up paying due to such mistakes would be more than what you earned from investing in crypto.
There are specific rules and regulations for investors in cryptocurrency, which, if not followed, could land you in trouble. Remember that tax regulations might also change, so it’s essential to stay informed and, if needed, seek professional advice. Use Beem to get a quick and accurate estimate of your federal and state taxes.
