Here’s What Happens if You Don’t Report Cryptocurrency on Your Taxes

For US-based taxpayers, the IRS considers cryptocurrency as property. When you purchase, sell, or exchange one crypto for another or for goods or services, this is treated as a taxable event, typically resulting in a capital gain or loss. The IRS taxes earned income from crypto activities such as mining or staking as ordinary income.

Taxpayers outside the US can refer to our helpful country guides for information about their region.

It’s essential you report crypto activity on your taxes, and there are effectively 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 the date they filed their return to file an amended return.  

A crypto tax accountant like ours at TokenTax will be able to assist you in navigating this process and will help ensure you remain compliant and properly file future tax returns. Reporting crypto tax is not optional. Learn more about how to report cryptocurrency on taxes.

Those new to crypto often ask “What happens if you don't report cryptocurrency on taxes?” Evading taxes related to cryptocurrency is a federal offense and can carry severe penalties. US-based taxpayers found guilty of tax evasion may face penalties of up to 75% of the tax owed, with a maximum fine of $100,000 ($500,000 for corporations), in addition to potential imprisonment for up to 5 years.

In November of 2022, the IRS declared it is building hundreds of cases related to crypto tax evasion. It is essential to properly file your crypto taxes this and every year and to file amended returns if you failed to properly file in previous years.

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, and if you’ve completed a know-your-client process with an exchange like Binance.US or Coinbase, the IRS can easily track your crypto activity and associate it with you.

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

Will I get audited for not reporting crypto?

Failure to report crypto won’t necessarily trigger an audit, but it’s possible the IRS will 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 returns and 0.97% of corporate returns between 2010 and 2018. While the odd of an audit may seem low, taxpayers should do everything in their power to avoid triggering one. This means reporting crypto accurately on your tax returns every year.

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.

In a very 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 itself is not a taxable event, 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.

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?”

How do I report cryptocurrency on my taxes?

The IRS requires taxpayers to report all sales of crypto, which it considers to be property. Selling, swapping, trading, or disposing of crypto in any way constitutes a taxable capital gain or loss. Earnings derived from staking, mining, and most yield farming are considered income and taxed accordingly. 

Investors must include their crypto gains, losses, and income in their tax returns using Form 8949 and Schedule D. Learn more about how to report cryptocurrency on taxes.

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.