At Risk For A Cryptocurrency Audit? - Atlanta Tax Lawyer (2024)

FAQs

What are the odds of getting audited for crypto? ›

Yes. If the IRS has reason to believe that you are underreporting your crypto taxes, it is likely that they will initiate an audit. Has anyone been audited for crypto? While cryptocurrency tax audits are relatively rare, it's likely that audits will become more common in the upcoming years due to increased IRS funding.

If the IRS decides to audit your cryptocurrency taxes, they'll send you a letter. Audits can happen through mail or in-person interviews. By law, you must keep tax records for at least three years, but the IRS can look at the past six years. So, it's best to keep records for at least six years.

Here are four steps you can take to help avoid a cryptocurrency audit. Report all of your income, including capital gains, mining income, staking income, and anything else. File the mandatory anti-money laundering forms (FBAR and 8938). If you don't, it could result in huge fines!

Who Is Audited More Often? Oddly, people who make less than $25,000 have a higher audit rate. This higher rate is because many of these taxpayers claim the earned income tax credit, and the IRS conducts many audits to ensure that the credit isn't being claimed fraudulently.

Generally, an audit team can complete a detailed report within a few days. However, larger applications may take longer to audit. Allowing time for a full security audit is essential to the success of your blockchain application.

Cryptocurrencies are traceable, with transactions recorded on a public ledger accessible to the IRS. The IRS uses advanced methods to track crypto transactions and enforce tax compliance. Centralized exchanges provide user data to the IRS.

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.

If you get audited and don't have receipts or additional proofs? Well, the Internal Revenue Service may disallow your deductions for the expenses. This often leads to gross income deductions from the IRS before calculating your tax bracket.

There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.

Which crypto exchanges do not report to the IRS? ›

Some cryptocurrency exchanges do not report user transactions to the IRS, including: Decentralized crypto exchanges (DEXs) like Uniswap and SushiSwap.

You can't always avoid an audit, but thorough records that support your deductions can quickly appease most auditors. Have supporting documentation for any deduction on your tax return, especially those that are significant or subject to special rules, such as rental losses.

They can seize funds from any accounts, including cryptocurrency.

If you buy Bitcoin, there's nothing to report until you sell. If you earned crypto through staking, a hard fork, an airdrop or via any method other than buying it, you'll likely need to report it, even if you haven't sold it.

In March 2014, the IRS issued Notice 2014-21 (the Notice), stating that cryptocurrency was to be treated as property, rather than currency for US federal income tax purposes.

Five common practice deficiencies related to crypto asset audits were identified in the CPAB's 2019 report, including (1) inadequate understanding of audit risks, (2) insufficient reliability evaluation of the information obtained from other third parties (such as centralized exchanges and custodians), (3) failure to ...

Cryptocurrencies are traceable, with transactions recorded on a public ledger accessible to the IRS. The IRS uses advanced methods to track crypto transactions and enforce tax compliance. Centralized exchanges provide user data to the IRS. Use crypto tax tools like Blockpit for accurate reporting and compliance.

There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally. Converting crypto to fiat currency is subject to capital gains tax. However, simply moving cryptocurrency from one wallet to another is considered non-taxable.