Claiming your bitcoin earnings from the previous year on your tax return may not be as enticing in light of recent market declines. But experts state that disguising taxable activities might get you in some serious trouble with the IRS.
The market for digital assets reached $2 trillion in 2021, with Bitcoin reaching a high of roughly $69,000 in November and Ethereum rising to almost $5,000 in the same month. Despite the fact that values fell in December, many individuals still made large returns.
With a simple yes-or-no question concerning “virtual money” at the top of the first page of your tax return, the IRS has also made it pretty obvious that they are keeping an eye on you.
But what if you forgot to report cryptocurrency on taxes? What happens if you don’t report cryptocurrency on taxes?
This article will be your savior if you forgot to report cryptocurrency on taxes. Let’s take a look, but before that, let us understand how cryptocurrency is taxed in the USA.
Cryptocurrency Taxes
The Internal Revenue Services, in the year 2014, decided that cryptocurrencies are not fiat currencies like the USD, Euro, etc. but rather digital assets. Since that time, it has been subject to capital gains taxation, much like other capital assets like equities, bonds, and real estate.
Every time you sell anything for a profit, capital gains are taxed. When you use cryptocurrencies to pay for goods or services and that crypto has appreciated in value since you first purchased it, capital gains taxes are triggered.
Similar to equities, you only have to pay capital gains taxes on the profit that was actually realized when you sold or traded your bitcoin. You don’t owe taxes on transactions that result in losses, but you still need to disclose these losses when you file your taxes.
That was all about how cryptocurrency is taxed. But the question we’re dealing with here is: What happens if you don’t report cryptocurrency on taxes? And the simplest answer to this question is — a lot can happen if you forget to report cryptocurrency on taxes.
What Happens if You Don’t Report Cryptocurrency on Taxes?
There is no time restriction on how far back the IRS can audit you if they have grounds to suspect that you have committed tax fraudulent activity. Investors can be confronted with an investigation and a tax bill they cannot cover years from now.
You might be unsure if the bitcoin activity you previously engaged in is even taxed. Generally speaking, the answer is “yes.”
You must disclose any bitcoin trade you conducted over the last several years on your yearly tax return.
IRS & Tax Fraud Detection
Many cryptocurrency investors believe that there is no way for the government authorities to see or realize that they are earning money trading, buying, or selling cryptocurrency because of the anonymous, decentralized nature of blockchain and cryptocurrency transactions.
Blockchains are decentralized public ledgers, thus it’s vital to remember that anybody may examine the ledger at any moment. Matching a wallet address with a person is practically the only way to determine a person’s activity on that ledger.
Data matching is a technique the IRS uses to combat tax fraud. The organization has already collaborated with service providers to examine blockchain transactions and locate these “anonymous” wallets.
Here’s What you Should Do if you Forgot to Report Cryptocurrency on Taxes
What happens if you don’t report cryptocurrency on taxes? What should you do if you previously submitted your tax return but forgot to report cryptocurrency on taxes because you were unaware that you were required to do so?
The best course of action if you forgot to report cryptocurrency on taxes is to revise your tax return for the year or years that you didn’t report your cryptocurrency earnings.
You have 3 years from the time you filed your original return to file an updated one. The IRS is well known for being more forgiving to taxpayers who establish a decent attempt to pay their taxes on time.
Here’s what you should do if you forgot to report cryptocurrency on taxes:
- Calculate Taxes
- Cryptocurrency Tax Forms
- Submit Forms
Step 1: Calculate Taxes
Finding out how much tax you owe might be challenging. You must be aware of your crypto’s fair market value at the time of every trade in order to do this. This chore may easily become challenging for traders who have conducted hundreds, if not thousands, of deals throughout the years.
Leveraging crypto tax software is the most straightforward technique to determine your capital profits and losses. You may report and file your crypto taxes with the aid of crypto tax software, which is connected with the most popular crypto exchanges, blockchains, and wallets.
With ZenLedger, you can streamline filing taxes and financial statement analysis while still adhering to IRS and SEC standards and regulations by using our crypto tax computation software.
Step 2: Cryptocurrency Tax Forms
Understanding which IRS tax document is needed for what situation might be confusing. We already know that investing in cryptocurrencies generates capital gains taxes, and that income taxes will result from activities like mining, staking, and reward collection.
Therefore, you should obtain a current IRS Form 1040X, Amended U.S. Individual Income Tax Return, once you have calculated your tax amount. You simply need to input new or updated details, and the form includes simple guidelines.
The most important cryptocurrency tax forms in the United States are:
| Tax Form | Purpose |
|---|---|
| Form 8949 (Sales and Other Dispositions of Capital Assets) | Complete summary of all crypto activities like selling, trade, etc. |
| Schedule D (Capital Gains and Losses) | Summary of your Form 8949 and includes the sum total of short-term and long-term capital gains |
| Form 1040 (Individual Income Tax Return) | Calculates total taxable income% |
| Schedule 1 | Your total additional income from crypto activities |
| Form 1099 K | Report non-employment income to the Internal Revenue Service. |
Step 3: Submit Forms
You can send your amended tax return to the IRS after you’re done. Make sure all essential papers and related documents are attached before mailing. Additionally, you must submit the extra tax amount with the return if your change results in a larger tax bill.
After submitting your updated return, all you have to do is wait. The IRS typically needs 8 to 12 weeks to complete your adjustment. According to the IRS, the procedure may now take more than 20 weeks as a result of pandemic delays.
Crypto Tax Loss Harvesting
Selling an asset to realize a loss and reduce your taxes is referred to as tax-loss harvesting. These losses can reduce up to $3,000 in ordinary income tax as well as any capital gains made during the year. If your losses for the year exceed $3,000 and you have any capital gains, you can carry the losses over to coming years and use them to offset the profits.
The Wash Sale Rule was created by the IRS to prevent investors from suffering losses and buying back the same investment within 30 days in order to ensure that everyone pays their fair share of taxes. Although these regulations apply to shares, the IRS views cryptocurrency investors as owning a property rather than securities, thus these regulations do not apply to them.
The Bottom Line
The federal government in the US has the authority to enact and implement tax laws. As a result, refusal to file, tax evasion, and tax fraud are all considered felonies under federal law.
In the end, you could have to pay fines totaling more than $100,000 and serve a year or more in federal jail.
ZenLedger easily calculates your crypto taxes and also finds opportunities for you to save money and trade smarter. Get started for free now or learn more about our tax professional prepared plans!
Report Crypto On Taxes – FAQs
1. Do I need to report to the IRS if I bought cryptocurrency?
The simplest answer to this question is — yes! All of your bitcoin profits, gains, and exchanges must be reported to the IRS. If the IRS has reason to believe you have engaged in tax fraud, they may audit you. Years from now, investors may be hit with an inquiry and a tax bill they are unable to pay.
2. What happens if I don’t report crypto losses?
Your cryptocurrency losses can be used to offset other cryptocurrency or stock market gains through tax-loss harvesting. You may deduct up to $3,000 loss from your regular income if your losses outweigh your gains. Any further losses are carried over to the following year.
3. What if I forgot to report crypto on taxes?
The IRS will contact any taxpayer who has not finished their yearly return or reports after the first failure to file. A punishment of up to $50,000 may be imposed if, following 90 days, they still haven’t declared their cryptocurrency earnings on Form 8938.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide tax, legal or financial advice. You must consult your own legal, tax, and accounting advisors before you engage in any form of transaction.
I'm a cryptocurrency taxation expert with in-depth knowledge of the intricacies involved in reporting and filing taxes related to digital assets. My expertise is grounded in a comprehensive understanding of the IRS regulations, tax forms, and the implications of not reporting cryptocurrency earnings accurately.
The article you provided highlights the importance of properly reporting bitcoin earnings on tax returns and the potential consequences of failing to do so. Here's a breakdown of the key concepts covered in the article:
-
Cryptocurrency Taxes in the USA:
- Cryptocurrencies are treated as digital assets by the IRS since 2014.
- Subject to capital gains taxation similar to other capital assets such as equities, bonds, and real estate.
- Capital gains taxes are triggered when selling cryptocurrencies for a profit or using them to pay for goods or services.
-
Consequences of Not Reporting Cryptocurrency on Taxes:
- No time restriction on IRS audits for suspected tax fraudulent activity.
- Failure to report cryptocurrency earnings can lead to investigations and tax bills.
- The IRS utilizes data matching to combat tax fraud, collaborating with service providers to examine blockchain transactions and identify wallet owners.
-
What to Do if You Forgot to Report Cryptocurrency on Taxes:
- Revision of tax returns for the year(s) in question within 3 years of the original filing.
- Calculate taxes owed, considering fair market value at the time of each trade.
- Use crypto tax software for accurate computation of capital gains and losses.
- Obtain and submit relevant IRS forms, such as Form 1040X, Form 8949, Schedule D, and others.
-
Crypto Tax Loss Harvesting:
- Selling assets at a loss to reduce taxes, with losses offsetting up to $3,000 in ordinary income tax.
- Excess losses can be carried over to future years to offset profits.
- The Wash Sale Rule does not apply to cryptocurrency investors, as they are considered owners of property rather than securities.
-
Potential Consequences of Tax Evasion:
- Refusal to file, tax evasion, and tax fraud are felonies under federal law.
- Penalties may include fines exceeding $100,000 and imprisonment for a year or more.
-
FAQs on Reporting Crypto on Taxes:
- All bitcoin profits, gains, and exchanges must be reported to the IRS.
- Cryptocurrency losses can be used to offset gains through tax-loss harvesting.
- Failure to report cryptocurrency earnings may result in penalties, including fines.
It's crucial for individuals involved in cryptocurrency transactions to adhere to tax regulations and report their earnings accurately to avoid legal consequences. If you have any specific questions or need further clarification on any of these points, feel free to ask.
