Have you ever wondered what happens if you don’t file your crypto taxes? There are repercussions for underreporting or failing to report your taxes at all for taxable activities. If you don't report cryptocurrency on your taxes, you'll probably be audited and receive a letter from the IRS stating that you owe taxes. You'll have to pay interest and penalties, and in more serious circumstances, you'll be prosecuted.
If you file inaccurate tax returns or don't file any taxes at all in the US, you will be subject to the same legal repercussions.
Today, we will discuss the consequences of not filing your cryptocurrency taxes, as well as how taxes operate and how to file. Also, we are answering frequently asked queries about crypto tax reporting.
What Happens If You Don’t Report Cryptocurrency on Taxes?
What happens if you don’t report cryptocurrency on taxes? All cryptocurrency-related transactions, including purchasing, selling, and trading, must be disclosed by taxpayers on their tax filings. Penalties and interest may be assessed for failure to record these transactions. Let's go into detail about this.
The IRS has made it plain that they require taxpayers to include all capital assets, including their cryptocurrency holdings, on their tax returns. Penalties for failing to comply with this might include fines and possibly jail time.
You shouldn't attempt to conceal your cryptocurrencies from the IRS for two key reasons:
- The IRS is taking action to stop tax avoidance with digital assets despite being well aware of the existence of cryptocurrencies.
The IRS sent a John Doe Summons against the well-known exchange Coinbase in July 2017, requesting data on all users who had purchased or traded Bitcoin between 2013 and 2015. Coinbase was compelled to provide the agency with data from more than 14,000 users as a result of the summons.
Almost 10,000 individuals who may have neglected to disclose their Bitcoin transactions and ownership on their tax returns received letters from the IRS in 2019. Be not one of them men.
- Penalties for failing to disclose your cryptocurrency holdings on your taxes might range from fines to jail time. Tax evasion carries a maximum sentence of five years in prison and a $250,000 fine (or double the amount of taxes evaded, whichever is greater).
Hence, even though it's feasible to evade detection if you fail to record your cryptocurrency transactions on your taxes, the risk isn't worth it. It's only a matter of time until more people are found and punished for failing to disclose their Bitcoin activities on their taxes, given the IRS's increased focus on tax enforcement involving digital assets.
It's not a good idea to neglect to disclose your Bitcoin gains or losses, regardless of whether you've introduced cryptocurrency to your financial portfolio for the first time this year or are a seasoned holder. Now with that said, I hope this article demonstrates that reporting cryptocurrency on your taxes isn't abstract and difficult, but rather fairly easy and simple.
What are Cryptocurrency Taxes?
Now we hope you understand what happens if you don't report cryptocurrency on taxes. But what exactly is this crypto tax? Most cryptocurrencies are convertible virtual currencies, according to the Internal Revenue Service (IRS). As a result, they can be used as a substitute for actual money and act as a medium of trade, a store of value, a unit of account, and a unit of worth.
Additionally, it means that you must pay taxes on any income you get from your cryptocurrency holdings. Nonetheless, there is much to learn about cryptocurrency taxation because, depending on the situation, you may or may not owe taxes. If you use or possess cryptocurrencies, it is essential to know when you will be taxed so that you are not caught off guard when the IRS comes to collect them.
You must pay capital gains tax on any profits made from the sale of bitcoin, just like when you sell shares of stock. If you use a cryptocurrency to pay for goods or services, you must pay taxes on the difference between the price you paid for the cryptocurrency and its value at the time you spent it. If you take Bitcoin in return for goods or services, you must report the revenue. If you mine cryptocurrencies, the value of your coin at the time it was created counts as revenue.
How Do Crypto Taxes Work?
Understanding how crypto taxes work is important to fully comprehend what happens if you don't report cryptocurrency on taxes. First of all, if you're simply "hodling," as enthusiasts would say, with cryptocurrency, you don't owe taxes on it. However, if you received any cryptocurrency income this year via staking, lending, or selling, you might need to pay taxes on the earnings.
Since the IRS views all cryptocurrencies as capital assets, selling them for a profit triggers capital gains tax liability. When you sell more conventional products, like stocks or ETFs, for a profit, this is exactly what takes place.
Consider purchasing $1,000 worth of Ethereum and afterward selling those same coins for $1,600. Your $600 capital gain must be disclosed on your tax return. Depending on how long you kept your coins, you may owe taxes.
The $600 profit would be subject to short-term capital gain taxes if you held your ETH for less than a year. Because short-term capital gains are taxed at the same rate as regular income, your tax rate is based on your adjusted gross income (AGI).
The highest federal income tax rate is 37%. As a single filer, you would have to earn $578,126 or more to be in the top bracket for 2023.
You would be eligible for the long-term capital gains rate if you held onto your ETH for a year or longer before selling them for a profit. Although it varies on your AGI, for many filers, this rate is less than ordinary income taxes.
Calculate Capital Gains & Loses on Crypto Tax
Capital gains are increases in the value of an asset. Usually, these gains are realized when the asset is sold. Due to their inherent price volatility, investments like stocks, cryptocurrencies, and ETFs are typically connected with capital gains.
Your gains and losses from purchasing and selling capital assets can be divided into two categories: long-term and short-term. Regarding the tax repercussions you'll face, the IRS handles these two classifications extremely differently.
Sale of a piece of property that you've owned for less than a year results in both short-term capital gains and losses. In 2022, the ordinary income tax rate on these gains will range from 10% to 37%.
The sale of property that you owned for more than a year results in long-term capital gains and losses, which are normally subject to favorable long-term capital gains tax rates of 0%, 15%, or 20% for 2022.
Establish your cost foundation for the property first. This is often the price you paid, increased (adjusted) by any fees or commissions you have to pay to complete the deal. Your modified cost basis refers to this last price.
The sale price is then calculated, and any fees or commissions you pay to finalize the deal are subtracted from (adjusted).
Lastly, to calculate the difference, deduct your adjusted cost base from the adjusted sale sum. A capital gain or loss is the consequence, depending on whether the amount is greater than or less than your adjusted cost basis.
Why Do You have to Report Taxes on Crypto Gains?
Cryptocurrency is categorized by the IRS as either property or a digital asset. Any time you swap or sell cryptocurrency, it is a taxable event. Using cryptocurrency to pay for goods or services is one example of this.
Cryptocurrencies are often taxed by the IRS as assets and are subject to either long-term or short-term capital gains taxes. Cryptocurrency is, nonetheless, occasionally considered income. Keep track of all your cryptocurrency activity to avoid a big tax surprise.
How to File Crypto Taxes in 2023
The next concern is how to file your cryptocurrency taxes. The selling of a cryptocurrency counts as a taxable transaction, even though purchasing it is not in and of itself a taxable event.
You need to keep track of every cryptocurrency transaction you make, including the cost of the cryptocurrency, how long you kept it, and how much you received when you sold it. You should also save the receipts for each transaction. Also, you must record the cryptocurrency's fair market value at the time it was bought or sold.
Your crypto exchange can send you and the IRS a 1099-B detailing your cryptocurrency transactions. But, if you move coins between offline cold wallets and your account, it might not record the cost basis or the initial price you paid for your cryptocurrency.
To keep track of your cryptocurrency transactions and complete the paperwork required to file your cryptocurrency taxes, use tools like Cointracker and Koinly, which connect to exchanges and digital wallets.
Prepare tax forms
Depending on how you utilized your cryptocurrency, you'll need to complete specific tax forms after you have a record of your transactional cryptocurrency activity. Here are a few samples of the kind of forms you might need to fill out.
Form 1040. This is the typical form that you will use to submit your yearly income taxes. There is a space on the form where you can list your overall cryptocurrency wins and losses.
1099-NEC form. You may be required to complete this form if you receive cryptocurrency through mining since such income is taxed.
Form 8949. Every cryptocurrency buy or sell is recorded on this form as an investment. This should include the quantity of cryptocurrency, the date, and price at which you purchased it, the date and price at which you sold it, as well as your profit or loss on each transaction.
Schedule C. If you acquired coins via mining, you must state whether you did so professionally or just for fun. If your income for the year exceeds your expenses and you operate a crypto-mining business, you may be liable for self-employment taxes.
Schedule D. Your overall capital gains and losses from all investments, including cryptocurrency, are listed on this form.
Schedule SE. If you are self-employed and received any cryptocurrency income, you might utilize this form.
It's never too early to prepare for your cryptocurrency taxes. You are now questioned about your participation in virtual currency transactions on the common Form 1040 tax return. In addition, the IRS started asking this question on Form 1040: "At any point in 2022, did you obtain, sell, send, swap, or otherwise acquire any financial interest in any virtual currency?"
Submit Your Taxes
You may integrate your preferred online tax software with the records you store in programs like CoinTracker or Koinly. Then, file your overall state and federal tax returns using the online tax program.
TokenTax offers a full range of accounting services to track and prepare both your crypto and normal taxes for individuals seeking one-stop shopping.
Think About Consulting a Professional
Because the regulations governing cryptocurrencies are continuously changing, preparing for them can be challenging. A certified public accountant (CPA) who specializes in this type of tax work may be worth the investment if you've earned a sizable income from Bitcoin and want to avoid the IRS pursuing you into the road.
What to Do If You Don’t Report Cryptocurrency on Taxes in Time?
Now you know what happens if you don't report cryptocurrency on taxes. So what should you do if you miss reporting on time?
If you realize you neglected to declare cryptocurrency income on your taxes, the best course of action is to amend your tax return for the year or years in question.
A revised return must be filed within three years of the previous one. Taxpayers who make a reasonable effort to pay their taxes on time are known to receive leniency from the IRS.
In case you failed to submit cryptocurrency income on your taxes, follow these steps:
Step 1: Determine Your Taxes
The amount of tax you owe could be difficult to determine. To do this, you must be informed of the fair market value of your cryptocurrency at the time of each trade. For traders who have executed hundreds, if not thousands, of deals over the years, this task might easily become difficult.
The easiest method to calculate your capital gains and losses is to use crypto tax software. With the help of cryptocurrency tax software, which is integrated with the most well-known cryptocurrency exchanges, blockchains, and wallets, you can report and file your cryptocurrency taxes.
Step 2: Tax Forms for Cryptocurrencies
It may be difficult to determine which IRS tax document is required in which circumstance. So, as soon as you have determined your tax liability, you should get an updated IRS Form 1040X, Amended U.S. Individual Income Tax Return. The form contains straightforward instructions, and all you need to do is input any new or updated information.
Step 3: Submit Forms
Once you're finished, you can email your revised tax return to the IRS. Before mailing, make sure all pertinent paperwork and files are included. If your adjustment results in a higher tax bill, you must also include the additional tax payment with your return.
All you have to do now is wait until after submitting your revised return. Normally, it takes the IRS 8 to 12 weeks to finish your adjustment. The IRS claims that due to pandemic delays, the process may now take more than 20 weeks.
How Do Businesses Report Capital Gain Taxes on Crypto
Depending on the type of business, different tax reporting rules apply to cryptocurrency capital gains. We'll go through three main business categories and how they report their taxes.
If you operate a business as an individual, you must declare such cryptocurrency income on Form 1040, sometimes known as your personal income tax return. It is subject to self-employment taxes in addition to regular income tax rates. Capital gains taxes range from 10% to 37% on short-term gains and 0%, 15%, or 20% on long-term gains, depending on your tax band (depending on the number of gains and your filing status).
An S corp or S corporation is a business structure. The tax code permits it to distribute its taxable income, credits, deductions, and losses to its owners immediately. Owners of partnerships or S corporations should keep in mind that income is reported on your Form 1040. As a result, you must pay self-employment taxes in addition to regular income taxes on your portion of the cryptocurrency income. Your tax bracket is again a factor in determining your short- and long-term capital gains.
A corporation's legal structure is called a C corporation (or C-corp). The shareholders, who make up the owners, are taxed separately from the business. As a C corp, the cryptocurrency income is subject to regular tax rates, which are now 21%, as well as potential state income taxation.
State capital gains taxes do not apply in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming. These states also have no state income taxes. There are 41 additional states, some of which are friendlier to capital gains than others. In case your state has any capital gains tax obligations, you should speak with your tax preparer.
How to Avoid Crypto Capital Gain Taxes
Crypto taxes are critical to deal with. What happens if you don't report cryptocurrencies on taxes? Can you avoid them? The truth is you can't avoid them fully. However, there are a few methods you can do to lessen the amount.
Harvest your Crypto losses
There are significant tax advantages to losing money when you sell your crypto. To offset any capital gains from cryptocurrencies, equities, and other assets as well as up to $3,000 in income, you can harvest your bitcoin losses. If your net loss is more than this limit, you may carry it forward indefinitely into subsequent tax years until all of your losses have been absorbed.
Cryptocurrency offers an advantage over other asset classes in terms of tax-loss harvesting. At this time, tax experts concur that crypto is exempt from the wash sale regulation, unlike stocks and equities. This implies that you can sell your cryptocurrency, report a loss, and then buy it back soon after.
Waiting until your assets are long-term property before selling them is the simplest approach to reducing your tax burden. Keep in mind that if you've kept your cryptocurrency for longer than 12 months, your capital gains tax will be lowered.
Take profits in a year with a modest income
Always keep in mind that the tax rate you pay on cryptocurrency disposals is determined by your income level for the year.
Because of this, some investors decide to cash out on their gains from cryptocurrencies in years when their income is low.
This may significantly alter how much money you owe in taxes in some cases. Keep in mind that for taxpayers earning under $40,000, there is no tax due on crypto sales made after one year.
Purchase and Sale of Cryptocurrencies Using Your IRA
Investors can grow their wealth tax-free with the aid of retirement accounts. Although a lot of well-known IRA providers forbid consumers from making direct investments in cryptocurrencies, you can do it through a self-directed IRA.
Using self-directed IRAs, investors can keep their retirement funds in non-traditional assets including precious metals, cryptocurrency, and real estate. You can make a combined $6,000 annual contribution to all of your IRAs, including self-directed IRAs, if you are under the age of 50.
Engage a CPA (Certified Public Accountant) with expertise in crypto
On your own, navigating the tax law can be challenging. For this reason, you might want to think about hiring an expert.
Although hiring a good accountant can be pricey, many investors believe the investment is worthwhile. A cryptocurrency-savvy accountant can recoup their fees by figuring out ways to reduce their tax liability.
Donations made in cryptocurrency can be a wonderful way to support important projects. Additionally, the IRS occasionally permits cryptocurrency investors to "double dip" on tax advantages by contributing cryptocurrency.
One of the few times when it is not taxed to dispose of cryptocurrency is when it is donated.
You can deduct your initial cost basis for purchasing your cryptocurrency if you give it within a year after buying it.
Taking out a loan in cryptocurrencies
Unlike when you sell your crypto, when you take out a loan it's not taxable (though the IRS has yet to issue explicit guidance on DeFi loans). A loan might be able to save you money, depending on the interest rate and your income range.
Record your cryptocurrency transactions carefully
To ensure that your tax returns are filed correctly, it's crucial to keep meticulous records of all of your cryptocurrency transactions. You should keep track of the cost of your cryptocurrency at the time of receipt and disposal, as well as the dates on which you bought and sold it.
How You Can Avoid Crypto Double Taxation
Double taxation is a tax concept that refers to paying income taxes on the same source of income twice. When income is subject to both corporate and individual taxes, it may happen. The IRS typically views cryptocurrency held by a business as an investment asset, much like stocks or mutual funds. The basis is established when you purchase cryptocurrency or receive it as company income. The goal of basis is to prevent double taxation on your gain by ensuring that you don't pay tax on the same thing twice.
Suppose, you spent $100 on cryptocurrencies that you later sold for $120. You received $120 in cash, but it is presumed that you have already paid taxes on the first $100, making the first $100 not subject to taxation. You had a base of $100 and sold it for $120, thus $20 of the sale price is taxed as a capital gain. If you sell anything for less than the basis, say $90, you would incur a $10 capital loss.
Let's use the example of receiving cryptocurrency as payment for services provided. You received $500 in cryptocurrency, which is taxable as regular income. Furthermore, $500 is the cryptocurrency's basis. The fundamentals of basis and how capital gains and losses are computed are presented here.
How to Minimize Taxes on Cryptocurrency
Since we're talking about what happens if you don't report crypto on taxes, we thought of how to reduce the tax amount. Keep in mind that you can't escape it. Nevertheless, there are methods you can employ to lessen it. These are some tips that we found beneficial.
Save crypto for a long time.
Gains from cryptocurrency investments are taxed at the favored long-term capital gains rate if you keep them for at least a year before selling them.
Balance out gains and losses.
Just with any investment, you can benefit from cryptocurrency gains by deducting losses from other investments you made over the year. The most you may write off in a single year is $3,000, and this procedure is known as tax-loss harvesting.
Time selling your crypto.
You can always try to wait out a lower tax rate if you have the luxury of time on your side.
Submit your mining costs.
Although it may appear to be a cheap pastime, crypto mining entails significant costs, such as those for computers, servers, electricity, and internet service providers. If you mine cryptocurrencies, you can subtract these expenses from your earnings, but the exact amount depends on whether you classify your activity as a business.
Investing in retirement is an option.
Although it's not as simple as investing through a typical brokerage account, you can delay or eliminate investment gains if you invest in cryptocurrencies through a retirement plan like a regular individual retirement account (IRA) or Roth IRA.
If you decide not to use the entire earnings from your cryptocurrency investment, you can reduce your tax liability by giving at least some of it to charity. The fair market value of your cryptocurrency at the time of contribution will be deducted from your tax refund.
Crypto Tax Loss Harvesting
Tax-loss harvesting for cryptocurrencies is a business tactic. It entails recognizing cryptocurrency losses to balance your capital gains and lessen your tax liability. Near the end of the year, when they can roughly estimate their entire gains, or during market downturns, when losses are at their maximum, investors often harvest their taxes. Gains in digital currencies or other assets, including dividends from year-end mutual funds, can be accounted for using the same technique as tax-loss harvesting in cryptocurrency.
Also, after deducting investment gains, you can utilize up to $3,000 of losses every year ($1,500 if you're married and filing separately) to offset regular income if your capital losses for the year outweigh your capital gains. In summary, you can offset up to $3,000 of regular income for the current tax year or upcoming tax years by using cryptocurrency tax losses.
When should I harvest my tax losses?
Throughout the tax year, you must harvest your losses. Your earnings and losses are fixed once the tax year is over. In the final month of the tax year, the majority of people choose to harvest their losses. If you are a U.S. taxpayer who is reading this at the end of the year, you must take action right away.
How much of my losses should I harvest?
The quantity of losses you can harvest has no upper bound. To sell as many assets at a loss as possible, you can devise a plan. You could, for instance, sell enough assets to result in a total capital loss or sell enough to result in no capital profits.
Risks of Crypto tax-loss harvesting
Even for seasoned investors, tax-loss harvesting carries some risk.
Lowering the cost basis
One danger is that tax-loss harvesting could reduce the asset's cost basis. When the sale price of an asset (the sum you received for selling it) exceeds the asset's cost basis, a capital gain results (the amount you paid for it). A lower cost basis results in a bigger capital gain, which in turn results in a higher tax burden.
Crypto wash sales
Harvesting your losses at the end of the year is completely lawful. Yet, if you quickly repurchase your assets, this might count as a crypto wash sale.
Presently, the wash sale regulation does not technically apply to crypto assets; it only covers securities. Yet, some bills that have been introduced aim to outlaw cryptocurrency "wash" sales. Investors should be aware that the topic is on the legislative agenda even if no legislation has been passed on it, and they should consult their crypto tax consultants before doing wash sales.
We always advise that you speak with your CPA before attempting to tax-loss harvest because of the danger involved.
Crypto Tax Reporting - What to Do If You Don’t Sell or Make Zero Profit
You won't owe taxes on the acquisition of a cryptocurrency if you just bought it during the year and didn't sell it, choosing to keep it in a wallet or on a cryptocurrency platform. Similar to how you wouldn't have to pay taxes if you bought and held equities for your portfolio.
The following events are not subject to tax.
- Holding cryptocurrency
- Transferring your crypto between different wallets
- Receiving a cryptocurrency gift
- Donating crypto
Reporting your crypto transactions can result in a tax benefit if you sold your cryptocurrency at a loss. Capital losses from stocks, cryptocurrencies, and other assets can outweigh capital gains. You may deduct up to $3,000 in capital losses if your net loss for the year is less than that amount. This practice is known as crypto tax-loss harvesting. It was covered in detail in the preceding section.
Cryptocurrency Tax - FAQ
Do You Have to Report Crypto Under $600?
Even if you only make $1, you must report all cryptocurrency you receive and the fiat currency you earn on your tax filings as income. Remember, whether or not your exchange issues you a 1099 form, you must still report all of your cryptocurrency revenue.
If your income from an exchange is less than $600, you must record it on your tax return. It's doubtful that this will have a significant effect on how much tax you owe. This will help you comply with tax regulations and demonstrate that you are trying your best to record all of your income.
Will the IRS Know if You Don’t Report Crypto?
The IRS is capable of tracking a wide range of cryptocurrencies, including Bitcoin, Ether, and many others. The IRS obtains KYC information from centralized exchanges to accomplish this. You may receive three tax forms from cryptocurrency exchanges: Forms 1099-K, 1099-B, and 1099-MISCs. You will receive a CP2000 letter and be the target of a correspondence audit if you fail to include the amounts reported on these forms on your tax return.
Can the IRS Track cryptocurrency?
Transactions using cryptocurrencies are pseudonymous. So many investors think they are untraceable. That is untrue.
Blockchains like Bitcoin and Ethereum allow for the public viewing of transactions. This means that the IRS may simply connect “anonymous” transactions to known individuals to track cryptocurrency transactions. The IRS has already collaborated with companies like Chainalysis to examine blockchain transactions and combat tax evasion.
With blockchains like Ethereum, NFT transactions are equally transparent to the public as monetary transactions. The same techniques the IRS employs to identify “anonymous” wallets may also be used to identify “anonymous” NFT holders.
Which Crypto Exchanges Do Not Report to the IRS?
At the moment, neither centralized exchanges like KuCoin nor decentralized exchanges like Uniswap collect user KYC (Know Your Customer) data.
The U.S. government's crackdown on cryptocurrency tax evasion may cause exchange policies to alter in the future, so it's crucial to keep this in mind. Due to pressure from the authorities, exchanges like Binance have recently implemented KYC procedures.
Where Do I Report Cryptocurrency on My Taxes?
There are various tax forms available for reporting bitcoins. You will typically submit your yearly income taxes using Form 1040. If you receive cryptocurrency from mining, you might need to file the 1099-NEC form because this income is taxable. The purchase or sale of a cryptocurrency is noted as an investment on Form 8949.
If you obtained cryptocurrencies by mining, Schedule C must specify whether you did so for a living or merely for fun. Schedule D lists your total capital gains and losses from all investments, including Bitcoin.
How Can I Report Crypto Staking Rewards on My Taxes?
In several nations, including the USA, Canada, the UK, and Australia, you are required to disclose staking prizes on your taxes. To properly report your staking income on your tax return, it is crucial to keep accurate records of your staking actions. Depending on your country's tax rules and how you file your taxes, a different form may be required to report cryptocurrency staking rewards. For instance, in the United States, you would typically use Form 1040 Schedule 1 to record cryptocurrency staking rewards as income on your tax return.
What Tax Forms Do You Need for Crypto?
The reporting of bitcoins is possible using a variety of tax forms. Form 1040 is commonly used to file annual income taxes. The 1099-NEC form may be required if you obtain cryptocurrencies from mining because this income is taxable. On Form 8949, the purchase or sale of a cryptocurrency is listed as an investment.
Schedule C must state whether you mined cryptocurrency for a living or just for fun if you did. Your overall capital gains and losses from all investments, including Bitcoin, are shown on Schedule D.
Do I Have to Report Crypto Losses on My Taxes?
Yes. You may gain from it. Tax-loss harvesting for cryptocurrencies is a business tactic. Recognizing cryptocurrency losses is required to balance out capital gains and reduce tax obligations. Investors frequently harvest their taxes around the end of the year when they can reasonably estimate their total gains or during down markets when losses are at their highest. The same method used for tax-loss harvesting in cryptocurrencies can also be used to account for gains in other assets, such as dividends from year-end mutual funds.