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.

In a previous announcement this year, 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 2023 and 2024 tax season. These newly appointed agents will undergo specialized training to adeptly correlate blockchain transactions with ostensibly "anonymous" wallets.

Given that blockchain technology operates on public ledgers, the IRS already possesses 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 a substantial number of cases related to crypto tax evasion. These cases are slated for public disclosure in the near future.

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.  

What is the penalty for not paying taxes on crypto?

The penalties imposed by the IRS for individuals engaging in crypto tax evasion can be quite severe, as both tax evasion and tax fraud constitute 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, instances of this form of tax evasion are not entirely unheard of.

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.

It's important to note that tax laws and regulations regarding cryptocurrency can vary significantly from one jurisdiction to another. It's essential for cryptocurrency users to understand and comply with the tax laws in their respective countries to avoid potential legal consequences.

Consulting with a tax professional with expertise in cryptocurrency taxation can be highly beneficial for individuals and businesses dealing with cryptocurrencies.

Learn more about how to report cryptocurrency on taxes.

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.

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 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.

To amend your tax return and include previously unreported cryptocurrency transactions, follow this 3-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. To accomplish this, maintain accurate records of your cryptocurrency sales and income events. If calculating your tax liability seems challenging, consider using specialized crypto tax software. By linking your wallets and exchanges, these platforms can swiftly generate a comprehensive tax return.

Step 2: Complete Form 1040X - After ascertaining your tax liability, download the current version of IRS Form 1040X, known as the Amended U.S. Individual Income Tax Return. This form comes equipped 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 have the option to either mail it to the IRS or e-file it. Prior to submission, double-check that you've attached all essential forms and supporting documents. Moreover, if your amendment leads to a higher tax obligation, make sure to include the additional tax payment along with your return.

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 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.

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.