Filing crypto taxes with the IRS just got more important

The US government has never been more aware of your crypto treasures. Archiving them is often more complicated than you think.

Crypto taxes have never received more attention from the US government. Last November, the IRS’s Criminal Investigation division revealed that it was 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. In the past, most were related to money laundering, he said, but tax cases now make up about half.

Last year, the IRS created a new Office of Cyber ​​and Forensic Services. Merges its Digital Asset Investigation, Cybercrime Investigation, Digital Investigation and Physical Investigation departments. Jim Lee has said that the office was able to track virtually any crypto transaction.

So if there was ever a time to get serious about your crypto treasures – now is it.

The fundamental

Tax season in the US usually 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 capital gains. Crypto gains, losses and income must be reported on Form 8940 & Schedule D. Capital gains taxes are calculated on the difference between the cost of acquiring assets and the sale price. So if you have earned, you should pay tax on the difference.

There are different rules for receiving crypto as income, for example if you have earned crypto as payment for a job. Participating in reward programs is also eligible for income tax. These rules are generally more complicated and should be examined thoroughly.

Not paying taxes is a risky move

Research from crypto tax platform Koinly shows that up to 15% of crypto traders do not know that crypto is taxable. By 2022, only 58 percent of crypto investors included their crypto in their tax returns, according to CoinLedger. An increase of 4% compared to the previous year.

However, failure to pay taxes is a federal offense. However, there is a difference between tax evasion and tax evasion. Tax avoidance is the process of legally reducing your tax bill. The penalties for tax evasion are up to 75% of the tax owed (up to $100,000) and five years behind bars.

In the words of British politician Dennis Healey, “The difference between tax evasion and tax evasion is the thickness of a prison wall.”

“The IRS tends to audit about two years after, which means any previous non-compliance with IRS rules can be picked up on the trail,” says Danny Talwar, head of tax at Koinly.

The tax authorities are paying more attention to crypto

The US government, including the IRS, has become increasingly sophisticated when it comes to finding your cryptographer. Several agencies, including intelligence services, are working with blockchain analytics 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 may see the IRS place more emphasis on crypto on your tax forms. Starting in 2023, Form 1040 will ask if US taxpayers had any digital assets in the past year.

“The IRS knows about your crypto already,” says Talwar. “Crypto exchanges are forced to share customer data with the IRS. In November 2022, the IRS confirmed that it is building hundreds of cases related to crypto tax evasion.

“It’s important to remember that data on public blockchains is inherently traceable, so it’s important to be upfront about taxes and fees. The IRS can request warrants to dig into exchange transactions and can use blockchain tracking technology to track crypto in audits and investigations.

Loss and theft should still be declared

2022 was a terrible year for the crypto markets and this can be reflected in your portfolio. However, this can be an advantage for the tax bill.

“Many investors’ portfolios are currently in the red – especially those who started crypto trading during 2021,” Talwar continues. “For those with a loss this year, they may think they don’t have a tax liability. But declaring a loss can be useful in carrying those losses against gains over future financial years.”

As of 2023, crypto investors are not allowed by the IRS to report lost or stolen crypto as a capital loss. This is due to the elimination of tax deductions for damage and theft losses in accordance with the Tax Cuts and Jobs Act. As a result, if you’ve lost your crypto due to a scam, hack, or lost your private keys, you won’t be able to claim a deduction on your taxes.

If in doubt, consult a tax professional

Crypto is notoriously complicated, and taxes can be even more so. Merging the two can be a nightmare if you’re not careful. If you are someone who carries out a large number of transactions, it is wise to call in experts.

“The IRS has made it more clear in recent years what information is required to report crypto taxes. But with potentially thousands of transactions across dozens of crypto wallets, blockchains and exchanges – it can be time-consuming and messy.”

“While IRS has taken steps to issue crypto-specific guidance, the pace of innovation has seen IRS scrambling to clarify complex tax treatment. That is why it is important to seek advice from a state-authorised auditor.”