What Happens if I Don’t File My Crypto Taxes?

For US-based taxpayers, the IRS considers crypto to be property. When you buy, sell, or exchange one crypto for another or goods, services, or fiat currency, this is typically a taxable event that usually results in a capital gain or loss and is taxed at the usual tax rates for cryptocurrency. The IRS also taxes earned income from crypto such as mining or staking as ordinary income.

US taxpayers must report any profits or losses from trading cryptocurrency and any income earned from activities like mining or staking on tax return forms, such as Form 1040 or 8949. Not reporting can result in fines and penalties as high as $100,000 or more severe consequences, including up to five years in prison.

In a 2023 announcement, the IRS disclosed its plan to bolster its workforce by adding an additional 87,000 agents, with a notable emphasis on intensifying crypto tax enforcement for the coming tax seasons. These newly appointed agents will undergo specialized training to correlate blockchain transactions with ostensibly "anonymous" wallets adeptly.

Since blockchain technology operates on public ledgers, the IRS already has access to a comprehensive record of transactions conducted on a specific blockchain. The primary task for these agents will be to establish connections between wallet addresses and their respective owners, a task they are well-prepared to execute.

Outside the US? Here's everything you need to know about international crypto taxes!

The initial stages of this augmented focus on crypto tax enforcement are already apparent. Jim Lee, the Chief of the IRS Criminal Investigation Division, officially confirmed in November 2022 that the IRS is actively constructing many cases related to crypto tax evasion. These cases are slated for public disclosure in the near future.

You must report crypto activity on your taxes. There are no loopholes to avoid this. If you’ve forgotten to report crypto on past returns, don’t panic. You may be able to amend your returns using Form 1040-X. It’s better to file cryptocurrency taxes late than not at all.

Failure to claim crypto on your taxes risks penalties, interest, and even criminal charges. US-based taxpayers have three years from filing their return to file an amended one.  

For example, a Texas man was indicted in 2024 for filing false tax returns and structuring cash deposits to avoid currency transaction reporting requirements. The indictment alleges that between 2017 and 2019, the man filed false tax returns that didn't report or underreported the sale of $4 million worth of bitcoin, leading to substantial gains. If convicted, he faces up to five years in prison for each structuring count and three years for each false return count.

What is the penalty for not paying taxes on crypto?

The IRS can impose quite severe penalties for individuals engaging in crypto tax evasion, as both tax evasion and tax fraud are federal offenses.

Depending on the gravity of the situation, one could potentially be subjected to penalties of up to 75% of the owed tax amount, with a maximum fine of $100,000 (or $500,000 for corporations) and a possible imprisonment of up to 5 years.

Cryptocurrency tax evasion falls into two distinct categories as defined by the IRS:

1. Evasion of Assessment

2. Evasion of Payment

Each category of crypto tax evasion carries its own set of penalties. Delving deeper into these categories can provide insights into the consequences individuals may face for non-compliance.

Evasion of assessment

Evasion of assessment is the more frequently encountered form of crypto tax evasion. It transpires when a taxpayer knowingly excludes or underreports income or inflates deductions. Instances of crypto tax evasion encompass:

1. Failure to report capital gains resulting from crypto sales or dispositions.

2. Underreporting capital gains stemming from crypto sales or dispositions.

3. Neglecting to report additional income obtained in cryptocurrency.

4. Omitting business income earned in cryptocurrency.

5. Not disclosing wages paid in cryptocurrency.

Evasion of payment

Evasion of payment unfolds after a tax assessment has been determined, and the taxpayer hides assets or funds that could settle their tax debt. While relatively less common in the crypto sphere, this form of tax evasion is not entirely unheard of.

Our expert team of crypto tax accountants at TokenTax is here to help you navigate the crypto tax filing process at any point, whether you've yet to file crypto tax or have neglected to do so in the past and need to file amended returns.

Tax laws and regulations regarding cryptocurrency can vary significantly from one jurisdiction to another. Cryptocurrency users must understand and comply with the tax laws in their respective countries to avoid potential legal consequences. Our team is available and will work with you and your unique circumstances to ensure compliance with your region's tax regulations.

Here are answers to frequently asked questions like “What happens if you don't report cryptocurrency on taxes” and “What if I don’t report taxes on crypto?”

Do you have to report crypto if you don’t sell?

In a simple scenario, you do not have to report crypto activity if you haven’t sold. Let’s say you purchased one Ethereum for $1,500 and hold it as a long-term investment. This is not in itself taxable, and you would only need to report gains or losses after you’ve sold.

That said, there may be situations in which you receive crypto as a form of income, in which case you must report this income even if you haven't sold the cryptocurrency. For example, if you earn interest on your cryptocurrency holdings, receive staking rewards, participate in an airdrop, or receive cryptocurrency as part of your salary, this must be reported as income and will be taxed at the going tax rates for cryptocurrency.

Do you have to report crypto under $600?

Yes. Per the IRS, US-based taxpayers must report gains or losses and income from all cryptocurrency transactions, regardless of the amount. The $600 reporting threshold only pertains to earned income from staking, rewards, or other activity which triggers exchanges to file a 1099. 

There is no reporting threshold for individual US-based taxpayers, so even if you earn $599 in staking rewards during a given year and don’t receive a corresponding 1099, you must report this to the IRS.

What happens if I don't report crypto losses?

A common question among those new to crypto is “what if I don’t report taxes on crypto,” including losses? Not reporting crypto losses can result in missed deductions against future capital gains, inaccurate tax filing resulting in penalties, fines, or increased IRS scrutiny, and an increased likelihood of an audit. 

We strongly recommend reporting all crypto activity, including income and capital gains and losses, to avoid potential legal and financial consequences of underreporting.

What happens if I forgot to report crypto on taxes?

If you forget to report crypto on your taxes, it's crucial to address it promptly. The IRS has intensified its focus on crypto tax enforcement, and failure to report may result in penalties, interest, and even criminal charges. You can amend your returns using Form 1040-X to rectify omissions. It's better to file late than not at all, and delaying further may increase the risks and consequences associated with non-compliance.

Will the IRS know if I don't report crypto gains?

It's best to assume the IRS has complete transparency into your crypto activity. Crypto exchanges, including Crypto.com, are legally obligated to share customer data. If you've undergone a know-your-client process with exchanges like Binance.US or Coinbase, the IRS can track and associate your crypto activity with you.

To avoid potential complications, accurately report all crypto gains in your annual filings and work with a crypto tax professional to clarify your tax situation.

Will the IRS know if I don't claim crypto?

The safest approach to this question is to assume the IRS has complete transparency into your crypto activity. Crypto exchanges are legally obligated to share customer data with the IRS. If you’ve completed a know-your-client process with an exchange like Binance.US or Coinbase, the IRS can easily track and associate your crypto activity with you.

In short, it’s best to assume the IRS has ways to associate your crypto transactions (including DeFi) with you personally and determine if you’re failing to claim your crypto activity in your annual filing properly.

Do all crypto exchanges report to the IRS?

Any exchange operating in the United States is required to report to the IRS. To do this, they collect users’ personal information to comply with know your customer (KYC) regulations. The IRS has issued John Doe Summons to request this information from exchanges like Coinbase and Kraken.

Numerous exchanges operating in the US issue 1099 forms to their customers and the IRS, including Coinbase, Kraken, Gemini, Crypto.com, Binance.US, Robinhood, and PayPal.

Will I get audited for not reporting crypto?

Failure to report crypto won’t necessarily trigger a crypto tax audit. Still, the IRS may consider it a red flag, and therefore, it’s likely to increase your chance of being audited. 

The IRS audited roughly 0.6% of personal and 0.97% of corporate returns between 2010 and 2018. While the odds of an audit may seem low, taxpayers should do everything possible to avoid triggering one. This means reporting crypto accurately on your tax returns every year.

To amend your tax return and include previously unreported cryptocurrency transactions, follow this three-step process:

Step 1: Calculate Your Tax Liability - Begin by determining your tax liability, which involves assessing your cryptocurrency-related capital gains and income for the tax year. Leverage software like ours at TokenTax to simplify this process.

Step 2: Complete Form 1040X - After ascertaining your tax liability, download the current version of IRS Form 1040X, the Amended US Individual Income Tax Return. This form comes with straightforward instructions, and you should only include new or revised information relevant to your cryptocurrency transactions.

Step 3: Mail or E-File Your Amended Tax Return - Once you've successfully amended your tax return, you can mail it to the IRS or e-file it. Before submission, double-check that you've attached all essential forms and supporting documents. Moreover, if your amendment leads to a higher tax obligation, include the additional tax payment and your return.