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

Cryptocurrency tax information can seem intricate, but filing and calculating your crypto taxes doesn’t have to be overwhelming. Here, we’ll cover the essentials of crypto tax filing to simplify the process.

The Internal Revenue Service (IRS) classifies Bitcoin (BTC) as property rather than currency. As a result, digital assets are taxed similarly to assets including stocks, bonds, and real estate. This means anyone who owns crypto must report any gains or losses on their taxes, regardless of the size of their holdings.

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

Failing to report crypto can have severe consequences, given the increasing scrutiny from tax authorities worldwide. Not reporting could result in fines, penalties, and even criminal charges. In November 2022, the Chief of the IRS Criminal Investigation Division, Jim Lee, confirmed that the IRS is actively constructing many cases related to crypto tax evasion. These cases are slated for public disclosure shortly. There are no loopholes in tax, and one must report crypto activity on one’s taxes. This section can introduce the need for awareness and responsible reporting among crypto investors.

Is Cryptocurrency a Taxable Asset?

Crypto is considered a taxable asset in many jurisdictions, including the United States (US) and South Africa (SA). Any gains from buying, selling, or trading cryptocurrencies can be subject to capital gains tax. Generally, if you sell crypto for more than you paid, the profit is taxable. Using crypto for purchases or services may also trigger tax liabilities, as it is treated as a property. Individuals must keep accurate records of their transactions, as tax authorities may require reporting crypto holdings and trades. Tax regulations vary widely, so consulting with a tax professional is advisable to ensure compliance with local laws.

Tax Implications by Country

Crypto tax regulations vary globally:

• US: The IRS treats crypto as property, meaning each transaction can trigger taxable events.
• United Kingdom (UK): Crypto is considered an asset taxed similarly to stocks.
• Australia: The Australian Tax Office treats crypto as property, applying capital gains tax (CGT).
• SA: SARS considers crypto assets for income tax and CGT purposes.

Cryptocurrencies are taxable assets in most jurisdictions, meaning any gains or losses from their sale, exchange, or use must be reported to tax authorities. Failure to accurately report crypto transactions can lead to severe consequences, considered tax evasion. Tax evasion occurs when individuals deliberately misrepresent or conceal their financial activities to avoid paying taxes owed. Many nations have implemented stringent regulations regarding the taxation of cryptocurrencies, highlighting the importance of transparency and accurate reporting. As tax authorities increasingly enhance their monitoring of crypto transactions, individuals must ensure compliance to avoid penalties, fines, or even legal action. Consulting a tax professional is highly recommended to navigate the complexities of crypto taxation and maintain compliance with local laws.

How Do Taxes Apply to Cryptocurrency?

• Capital Gains Tax (CGT): Selling or trading crypto for a profit can trigger capital gains tax.
• Ordinary Income Tax: Staking rewards, mining, or payments received in crypto are taxed as income.
• Trading and Exchanges: Each transaction, even crypto-to-crypto, may be taxed.

CGT

Taxable Events:

• Selling Cryptocurrency for Fiat: If you sell BTC for $10,000 and buy it for $5,000, you have a capital gain of $5,000. This gain is subject to capital gains tax.
• Trading One Cryptocurrency for Another: If you trade Ethereum (ETH)for Litecoin and the value of Ether has increased since you acquired it, the gain is realised and taxed as a capital gain.
• Using Cryptocurrency to Purchase Goods or Services: When you use BTC to buy a car, the IRS treats this as a sale of the BTC. If the BTC has appreciated since you purchased it, you’ll owe capital gains tax on the difference.

Classification:

• Short-term Capital Gains: If you held the asset for one year or less, it is taxed at your ordinary income tax rate.
• Long-term Capital Gains: If you held the asset for more than one year, it is taxed at a lower rate, typically 0%, 15%, or 20%, depending on your taxable income.

Ordinary Income Tax

Taxable Events:

• Mining Cryptocurrency: The cryptocurrency’s fair market value on the day you receive it is considered ordinary income and subject to income tax.
• Staking Rewards: Similar to mining, rewards earned from staking are taxed as ordinary income based on the fair market value when you receive them.
• Airdrops: If you receive free crypto through an airdrop, the fair market value of the coins on the day you gain control over them is taxed as ordinary income.

Classification:

• Taxed at ordinary income tax rates, which can vary based on your overall income and tax bracket.

Trading and Exchange

Taxable Events:

• Day Trading: Frequent buying and selling of cryptocurrencies can lead to numerous capital gains or losses, all of which need to be reported and calculated for tax purposes.
• Exchange Fees: Fees paid during trades can often be deducted from your capital gains, reducing your taxable income.
• Losses from Trades: If you sell a crypto at a loss, you can use that loss to offset capital gains from other transactions. If your losses exceed your gains, you can often deduct a certain amount against your ordinary income.

Classification:

• Each transaction is treated as a separate taxable event, requiring diligent record-keeping to report gains and losses accurately.

What Will Happen If I Don’t Include Cryptocurrency In My Taxes?

Failing to report crypto earnings could result in various penalties:

Legal Consequences

1. Penalties and Fines: The IRS imposes fines and penalties for failure to report, misreporting, or evading crypto taxes.
2. Criminal Charges: In severe cases, the IRS can press criminal charges for tax evasion or fraud.

Financial Consequences

1. Impact on Credit Score: Unpaid taxes may lead to a tax lien, damaging credit.
2. Negative Financial Portfolio Implications: Non-compliance reflects poorly, impacting future financial opportunities.
3. Increased Scrutiny: Failing to report raises red flags, increasing scrutiny in future tax filings.

IRS Guidelines for CryptoTax

The IRS has detailed guidelines on crypto taxation, including:

• IRS Notice 2014-21: First guidance on treating crypto as property.
• IRS FAQ: Provides answers to various crypto-related tax questions.
• Form 1040 Declaration: Individuals must declare if they are dealing with virtual currencies.
• IRS Revenue Ruling 2019-24: Defines taxable events and clarifies tax reporting on rigid forks and airdrops.

IRS Notice 2014-21

• Reporting Process: This notice was the first formal guidance from the IRS regarding virtual currencies. It clarifies that virtual currency is treated as property for federal tax purposes, meaning that general tax principles applicable to property transactions apply to transactions involving virtual currency. Taxpayers must report gains and losses on their tax returns.
• Taxable Events: The notice identifies several taxable events, including:
  • Selling virtual currency for cash or property.
  • Exchanging virtual currency for goods and services.
  • Using virtual currency to pay for goods and services.
  • Receiving virtual currency as payment for services.
• Penalties: While the notice doesn’t explicitly outline penalties, it emphasises the importance of accurate reporting, suggesting that failure to report income or capital gains may lead to penalties.

IRS FAQ

• Reporting Process: The IRS website’s FAQ section provides additional clarity on reporting crypto transactions. It typically includes questions about calculating gains and losses and the appropriate forms for filing.
• Taxable Events: Similar to Notice 2014-21, the FAQ clarifies taxable events involving virtual currencies. It also discusses scenarios like receiving crypto through mining or forks, both of which are taxable.
• Penalties: The FAQ outlines potential penalties for non-compliance, including failure-to-file penalties, accuracy-related penalties, and interest on unpaid tax.

Form 1040

• Reporting Process: Form 1040 is the standard individual income tax return form that taxpayers use to report their income, deductions, and credits. Starting in 2020, the form includes a specific question regarding crypto. It requires taxpayers to disclose if they received, sold, sent, exchanged, or otherwise acquired any financial interest in virtual currency during the tax year.
• Taxable Events: Reporting taxable events on Form 1040 involves calculating capital gains and losses from cryptocurrency transactions and reporting that information on Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets).
• Penalties: Failure to accurately complete Form 1040 can result in various penalties, including fines for underreporting income or not reporting capital gains.

IRS Revenue Ruling 2019-24

• Reporting Process: This ruling further clarifies the tax treatment of transactions involving virtual currency, such as hard forks and airdrops, detailing how to report these transactions on tax returns.
• Taxable Events: Revenue Ruling 2019-24 specifies that if a taxpayer receives cryptocurrency from a hard fork, it is treated as income at the fair market value of the currency received. This ruling helps clarify when taxpayers must recognise income from their crypto activities.
• Penalties: While the ruling does not impose penalties, it highlights the importance of compliance with tax laws regarding virtual currencies. Non-compliance can lead to penalties similar to those discussed in the previous documents.

How to Report Cryptocurrency on Tax Returns

1. Use Form 8949 For capital gains or losses.
2. Attach Schedule D: Summarise all gains and losses.
3. Report Income on Schedule 1: Include staking, mining, or rewards income.
4. Cryptocurrency Software: Consider using tax software to integrate crypto transactions for easy reporting.

Professional Advice Can Help

Highlight the benefits of seeking professional help for crypto taxation:

• Tax Consultants: Aid in accurate reporting and strategy.
• Crypto-Focused CPAs: Stay up-to-date on crypto regulations.
• Legal Advice: Essential if facing IRS scrutiny or audit.

Frequently Asked Questions (FAQs)

1. Can I offset cryptocurrency losses against gains?

Yes, capital losses on crypto can offset gains, reducing tax liability.

2. Are crypto gifts and donations taxable?

Gift taxes may apply for substantial donations, and recipients may owe tax if they sell the gifted asset.

3. Do I need to report cryptocurrency if I haven’t sold or traded it?

Generally, holding alone isn’t taxable, but tracking when sales eventually occur is essential.

4. Are airdrops and forks taxable?

Both are taxable as ordinary income upon receipt, per IRS guidelines.

5. Is crypto-to-crypto trading taxable?

Yes, any exchange of one crypto for another is a taxable event in the US.

Being aware of these classifications and their implications can help you manage your tax liabilities effectively in the ever-evolving landscape of crypto investments. Understanding and complying with crypto tax laws is crucial for individual investors and businesses operating in digital assets. As governments worldwide increasingly regulate cryptocurrencies, the tax implications of transactions can be complex and vary significantly by jurisdiction.

Failing to comply can lead to severe penalties, including hefty fines and legal repercussions. Moreover, understanding these laws helps investors accurately report their gains and losses, enabling better financial planning and risk management. Additionally, compliance fosters a sense of legitimacy in the cryptocurrency market, encouraging responsible investing and contributing to the overall maturation of the industry. By staying informed about tax obligations, individuals and organisations can navigate the evolving landscape of cryptocurrency regulation while safeguarding their financial interests.