Can I really be audited for crypto taxes?
Why have the risks of a Crypto tax audit increased?
On October 1, 2018, the IRS swore in a new commissioner, Charles Rettig. A few weeks after being sworn in, Rettig implied that there will be an increased focus on crypto, stating:
"the IRS will have more information about [crypto] than you can ever imagine."
Additionally, in November, the IRS announced that they will hire 250 agents over the next 18 months within their Criminal Investigation division with a major focus on crypto.
Basics of Crypto Taxes
Now that it's clear the risk of ignoring crypto taxes, let's discuss some general points:
Any time you exchanged bitcoin (or any altcoin) for any other coin for any product, service, or another coin — it was a taxable transaction from the IRS’ perspective. This means that you need to pay taxes on crypto-to-crypto transactions, not only if you cash out to FIAT.
If you used crypto to purchase goods or services, the purchase is considered a taxable event.
If you obtained your crypto via mining, you have to pay your ordinary income tax on it. The good thing is that you can deduct your expenses against the income.
If the crypto you use in a trade or transaction was not held for more than a year, the gains would be taxed at the short-term capital gains rate, which is much higher than the long-term capital gains rate.
If you accept salary in crypto, you have to pay ordinary income tax on it.
There are different accounting methods that are allowed in the United States to calculate your crypto exposure. The most popular is FIFO (First In First Out). This means that the bitcoin you first bought will be the first bitcoin sold when you sell them for cash, an altcoin, or a good. This is the most popular method, not because it's the only legal one, but because its the most simplistic.
There are other methods that should also be analyzed prior to settling on a method. TokenTax can identify the method that minimizes tax exposure. TokenTax’s software incorporates all of your transactions across numerous exchanges and determines which accounting method works the best for you.
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