Cryptocurrency tax compliance remains a priority for the IRS. Taxpayers are required to treat cryptocurrency as property for tax purposes, which may result in ordinary income or capital from cryptocurrency transactions.
Cryptocurrency Tax Treatment
Taxpayers who receive property in exchange for services are required to report the property received as income on their tax return. This treatment also applies to cryptocurrency transactions.
If cryptocurrency is later sold at a gain or loss by the taxpayer, it may result in either an ordinary gain or loss or a capital gain or loss. Capital gains and losses may be further characterized as short-term or long-term.
The value of the cryptocurrency is determined on the date of the acquisition or sale. The market rate listed on a public exchange may be used to determine this value.
Unreported Cryptocurrency Transactions
Many taxpayers have unreported cryptocurrency transactions. The IRS sent 10,000 letters in the summer of 2019 to inform taxpayers of their obligation to report these transactions and pay the requisite taxes.
If you have unreported cryptocurrency income, you may need to take the following steps:
- Amend your tax returns to report the income, gain, or loss.
- Pay taxes due on the cryptocurrency transactions.
- Pay penalties and interest due on the late payment.
Make sure you work with a tax professional who understands cryptocurrency transactions when you amend your returns. Like other tax returns, amended returns may be selected for an IRS audit.
Consequences of Noncompliance
The IRS may audit your return if you fail to properly report your cryptocurrency transactions. You will then have to deal with the audit process and possibly end up paying the back taxes, penalties, and interest. The IRS may also take this opportunity to look more closely at other items on your return.
In addition, the IRS may pursue tax fraud penalties if there is an indication that you willfully failed to report these transactions. The IRS may also initiate a criminal investigation, particularly if your case would make a good example to deter other taxpayers from similar conduct.
If you have unreported cryptocurrency income, contact a tax attorney to discuss your options for reducing your exposure to IRS tax problems.
The Gartzman Law Firm can help you with cryptocurrency taxes and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.