The tax deadline is fast approaching. And if you’ve invested in or transacted with cryptocurrency during 2021, you might wonder whether you must report crypto on your tax return and what consequences you could face if you don’t.
In short, yes, you are required to disclose certain crypto-related transactions to the IRS. The current tax year’s Form 1040 specifically asks, “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
Intentionally failing to report cryptocurrency (or virtual currency as the IRS refers to it) is a crime – or can be multiple crimes depending on your actions or inactions. You could be sentenced to federal prison and/or ordered to pay high fines if you are convicted.
What Crypto Details Do I Have Report on My Taxes?
Cryptocurrencies like Bitcoin, Ethereum, and Dogecoin function similarly to fiat currencies like the U.S. dollar. For instance, you can buy or sell goods or services with them or exchange them for other currencies. Yet, unlike fiat currency, crypto does not have legal tender in the U.S. So how and when is it taxable?
According to the IRS, cryptocurrency is taxed like property, such as stocks. You only have to report crypto on your taxes if certain events occur.
For example, the following are taxable transactions:
- Trading crypto
- Swapping one crypto for another
- Buying or selling goods and services with crypto
The IRS’s virtual currency FAQ page states, however, that you do not have to report cryptocurrency if all you did was buy it with U.S. dollars and it sat untouched in the crypto exchange or your personal wallet.
Essentially, you are required to report crypto if you experienced any gains or losses with it. The taxable amount is based on the price you paid for the currency and what you earned or lost when you made a transaction. Depending on how long you had the crypto, you may be subject to long-term or short-term capital gains rates.
In addition to reporting crypto gains and losses, the IRS states that you must include any income you earned from it. In other words, if someone paid you for goods or services in cryptocurrency, the fair market value at the time you received the currency must be factored into your gross income for the year. Similarly, if you “mined” virtual currency, this also must be computed in your income.
What Charges Can You Face for Not Reporting Crypto on Your Taxes?
Failing to report cryptocurrency on your taxes may be considered tax fraud or tax evasion. Referring solely to federal laws, you could be prosecuted under a couple of different statutes.
Tax fraud charges may arise under 26 U.S.C. § 7206(1) or § 7207. Section 7206 states that it is a crime to willfully provide false material information on a tax return. For instance, we noted above that the IRS asks all taxpayers to disclose whether they made any transactions with cryptocurrencies in the past year. Intentionally checking the “no” box instead of the “yes” box to conceal taxable events involving crypto may be an offense under this statute.
A conviction can result in imprisonment for not more than 3 years and/or a fine of not more than $100,000.
According to § 7207, a person may be charged if they deliver a tax return knowing that it contains false information. This crime is punishable by up to 1 year of imprisonment and/or up to $10,000 in fines.
Tax evasion is an offense under 26 U.S.C. § 7201. Evasion involves a willful attempt to illegally decrease a person’s tax liabilities.
It can be done in several ways, such as:
- Omitting income
- Underreporting income
- Overstating deductions
As noted earlier, the IRS states that anyone paid in cryptocurrency must report their earnings as part of their gross income. Failing to do this is a violation of § 7201, penalized by a maximum prison term of 5 years and/or a maximum fine of $100,000.
What Actions Has the IRS Taken Concerning Crypto Tax Reporting?
As the cryptocurrency landscape continues to grow, so too do the measures the federal government has enacted to identify individuals who have failed to report cryptocurrency transactions on their taxes.
For example, in 2017, the IRS issued a summons to Coinbase to get information about U.S. customers who bought, sold, sent, or received crypto on the exchange. After some back and forth in court, Coinbase handed over to the IRS details of over 14,000 account holders.
The IRS Criminal Investigation Division recently established a cryptocurrency task force to identify and investigate individuals believed to have evaded or attempted to evade taxes by not reporting qualifying virtual currency transactions. According to a Forbes report, in March of 2021, the IRS also announced that it had assembled a team of experts to carry out what has been dubbed Operation Hidden Treasure. The probe is focused on tracking cryptocurrency transactions, which are often difficult to trace, and identifying U.S. taxpayers.
Also, the bipartisan infrastructure bill President Biden signed contained a provision requiring cryptocurrency exchanges to report transactions to the IRS beginning in 2023, according to a Times article. The requirement would make it more difficult for U.S. taxpayers to keep their virtual currency dealings hidden.
Charged with a Crypto-Related Tax Crime?
When the federal government pursues an alleged tax evasion or tax fraud offense, it must prove that the defendant acted willfully. Because cryptocurrency is relatively new and the IRS has only recently started issuing clear guidelines on reporting requirements, an individual might unknowingly get caught up in an investigation.
Hager & Schwartz, P.A. is ready to fight for you whatever your situation. We have decades of combined legal experience, and both members of our team are former prosecutors. We can leverage our knowledge and insights to work toward a favorable outcome on your behalf.
For help in Fort Lauderdale, please call us at (954) 840-8713 or contact us online today to schedule your free initial consultation.