What Happens If You Don’t Report Cryptocurrency On Taxes?

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Written By Santana

Bitcoin enthusiasts dedicated to unraveling the complexities with practical insights

Cryptocurrency has recently taken the world by storm, achieving unprecedented popularity and value. As digital currency becomes increasingly mainstream, it’s essential to understand how it’s taxed in the United States and the consequences of not reporting cryptocurrency on your taxes.

What is Cryptocurrency, and How is it Taxed?

Cryptocurrency is a form of digital currency that uses encryption techniques to regulate the generation of currency units and verify the transfer of funds. In the US, cryptocurrency is treated as property for tax purposes, meaning it’s subject to capital gains tax. Like any other property, you’ll owe taxes on the gain if you sell or exchange your cryptocurrency for more than you paid.

It’s worth noting that there are different tax rates for short-term and long-term capital gains. Short-term gains, or gains from assets held for less than a year, are taxed at the same rate as ordinary income. Long-term gains, or gains from assets held for more than a year, are taxed at a lower rate. These tax rates vary depending on your income level.

Consequences of Not Reporting Cryptocurrency on Taxes

Not reporting cryptocurrency on taxes can lead to fines, penalties, IRS audits, and even criminal charges. The failure-to-report penalty can reach 25% of the total tax owed, while the accuracy-related penalty may apply if the tax liability is significantly underestimated. In cases of fraudulent non-reporting, the penalty can be as high as 75% of the tax owed.

Additionally, the risk of IRS audits increases significantly when cryptocurrency is involved. The IRS has announced that it’s prioritizing cryptocurrency reporting and has even sent letters to taxpayers with cryptocurrency holdings, urging them to report their activity. Failing to report cryptocurrency could result in an audit, additional penalties, and interest.

Why Do People Avoid Reporting Cryptocurrency on Taxes?

There are a few reasons why some cryptocurrency investors might avoid reporting their activity on their taxes. Firstly, there’s a misguided belief that cryptocurrency is anonymous. While transactions can be challenging to trace back to an individual, the IRS has ways of tracking cryptocurrency activity through exchanges and other means.

There’s also a misunderstanding of tax regulations around cryptocurrency. Some investors don’t realize they need to report their cryptocurrency gains and losses on their taxes or aren’t sure how to do so.

Finally, some investors may fear IRS audits or don’t want to pay taxes on their gains. However, it’s important to remember that the consequences of not reporting cryptocurrency far outweigh the benefits of trying to avoid taxes.

How to Report Cryptocurrency on Taxes

You’ll need to keep accurate transaction records to report cryptocurrency on your taxes. This includes the date, purchase price, and fair market value at the time of sale. You’ll also need to use the appropriate forms and software to report your gains and losses. This can be complicated, so seeking professional help from a tax expert is always a good idea.

Conclusion – What Happens If You Don’t Report Cryptocurrency On Taxes?

Reporting your cryptocurrency activity on your taxes is essential to avoid fines, penalties, and criminal charges. Despite the belief that cryptocurrency is anonymous, the IRS has ways of tracking it, and failing to report it could result in an audit. Keeping accurate records and seeking professional help when needed can make the reporting process easier.

What Happens If You Don't Report Cryptocurrency On Taxes?

FAQs:

Is cryptocurrency taxed differently than other investments?

No, cryptocurrency is treated as property for tax purposes, just like any other investment.

What if I didn’t make a profit on my cryptocurrency investment?

Even if you didn’t profit, you must still report your cryptocurrency on your taxes.

Can I deduct losses on my cryptocurrency investment?

Yes, you can deduct losses on your cryptocurrency investment, but there are specific rules and limitations.

Should I report cryptocurrency held in a foreign account?

Yes, if you’re a US taxpayer, you must report all foreign accounts and assets on your taxes, including cryptocurrency.

What if my cryptocurrency was stolen or lost?

If your cryptocurrency was stolen or lost, you might be able to deduct it as a loss on your taxes, but you’ll need to provide documentation and follow specific reporting requirements.

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