The US Government has never paid more attention to your crypto taxes. Filing them is often more complicated than you think.
Crypto taxes has never received more attention from the US Government. Last November, The IRS’s Criminal Investigation division revealed they were building “hundreds” of crypto cases.
“In the last three years, I’ve really seen a shift” in digital asset investigations, said Jim Lee, head of the IRS Criminal Investigations division. Previously, most were related to money laundering, he said, but tax cases now make up approximately half.
Last year, the IRS created a new Office of Cyber and Forensic Services. Merging its digital asset investigation, cybercrime investigation, digital forensics, and physical forensics support divisions. Jim Lee has said the office was capable of tracing essentially any crypto transaction.
So if there was ever a time to take your crypto taxes seriously — it’s now.
The Basics
Tax season in the US typically begins on January 1st and ends on April 15th. During this time, taxpayers must file their federal income tax returns for the previous year with the Internal Revenue Service (IRS).
In the US, crypto-assets are taxed both as income and as capital gains. Crypto gains, losses, and income must be reported on Form 8940 & Schedule D. Taxes on capital gains are calculated on the difference between the cost of acquiring assets and their sale price. So if you’ve made a profit, you should be paying tax on the difference.
There are different rules for receiving crypto as income, such as if you’ve earned crypto as payment for a job. Participating in staking reward programs is also eligible for income tax. These rules are generally more complicated and should be researched thoroughly.
Not Paying Your Taxes Is a Risky Move
Research by the crypto tax platform Koinly shows that up to 15% of crypto traders don’t know that crypto is taxable. In 2022, Only 58 percent of crypto investors included their crypto in their tax returns, according to CoinLedger. A 4% increase compared to the year before.
However, not paying your taxes is a federal offense. However, there is a difference between tax evasion and tax avoidance. Tax avoidance is the process of legally reducing your tax bill. The penalties for tax evasion are up to 75% of the tax due (up to $100,000) and five years behind bars.
In the words of British politician Dennis Healey, “The difference between tax avoidance and tax evasion is the thickness of a prison wall.”
“The IRS tends to audit approximately two years behind, meaning any previous non-compliance with IRS rules may be picked up down the track,” says Danny Talwar, Head of Tax at Koinly.
The IRS Are Paying More Attention to Crypto
The US government, including the IRS, has become increasingly sophisticated when it comes to finding your crypto. Multiple agencies, including intelligence services, work with blockchain analysis firms like Chainalysis to track crypto associated with criminal behavior.
So if the IRS doesn’t have sufficient in-house crypto knowledge, someone else will.
You can see that the IRS is paying more attention to crypto on your tax forms. From 2023, Form 1040 will ask whether US taxpayers held any digital assets in the past year.
“The IRS knows about your crypto already,” says Talwar. “Crypto exchanges are compelled to share customer data with the IRS. In November 2022, the IRS confirmed it’s building hundreds of cases relating to crypto tax evasion.”
“It’s important to remember that data on public blockchains are inherently traceable, so it is important to be upfront when it comes to your taxes. The IRS can request powers to dig into exchange transactions and can use blockchain tracing technology to track crypto in audits and investigations.”
Losses and Theft Should Still Be Declared
2022 was a terrible year for the crypto markets, and this may be reflected in your portfolio. However, this can be a benefit for your tax bill.
“Many investors’ portfolios are currently in the red – particularly those who started crypto trading during 2021,” continues Talwar. “For those sitting on losses this year, they may believe that they have no tax obligations. However, declaring losses can be useful in order to carry forward these losses against gains over future financial years.”
Starting from 2023, crypto investors are not permitted by the IRS to report their lost or stolen crypto as a capital loss. This is due to the elimination of tax deductions for casualty and theft losses under the Tax Cuts and Jobs Act. As a result, if you have lost your crypto due to a scam, hack, or losing your private keys, you will not be able to claim a deduction on your taxes.
If in Doubt, Seek a Tax Expert
Crypto is notoriously complicated, and taxes can be even more so. Merging the two can be the stuff of nightmares if you’re not careful. If you’re someone who conducts a large number of transactions, it is advisable to call in the experts.
“The IRS has made it more clear over recent years what information is required in order to report crypto taxes. However, with potentially thousands of transactions across dozens of crypto wallets, blockchains, and exchanges – it can be time-consuming and messy.”
“Whilst the IRS has taken steps to issue crypto-specific guidance, the pace of innovation has led to tax authorities playing catch up to clarify complex tax treatment. That’s why it’s important to seek advice from a Certified Public Accountant.”
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