How to Amend Your Tax Returns if You Have Bitcoins and Other Cryptocurrencies

How To Amend Your Tax returns If You Have Bitcoins And Other Cryptocurrencies

With the recent boom of cryptocurrencies, it is not surprising that thousands of Americans have invested in at least one, even if it isn’t the very famous Bitcoin. As promising as cryptocurrencies investment sounds, there is an issue when it comes to amending your tax returns when you hold or have held such assets. The problem comes from the fact that there’s no real amnesty program implemented as of now by the IRS and it becomes a little unclear how to amend your tax returns if you have Bitcoins and other cryptocurrencies. We, however, have a few bits of advice for you.

Act Before They Do

Since there isn’t a formal amnesty process in such scenarios, timing will be of the greatest importance to you. This means that you need to correct your income for past years before the IRS finds out that you actually received more than you declared. Generally, you would be able to do that yourself if the difference in amounts is not too big. However, in cases where transgressions are of more substance, we would recommend using a tax accountant to contact the IRS on your behalf and amend your tax return.

How Crypto Investors Should Treat Basis For Tax Purposes

It seems like the whole world is a buzz with cryptocurrency speculation. Will it really be the new form of currency exchange that will take over everything that we’ve ever known about currency? Depends on whom you ask. But either way, cryptocurrencies have attracted the attention of investors all over the world and at every level of investment understanding and proficiency.

It’s brought many questions to the forefront for investors like how can we regulate the crypto industry? What are the legal ramifications of crypto? How do we tax crypto? The IRS doesn’t even recognize crypto as a currency. Rather they see it as a possession like an asset, same as a house or a stock. So in order to correctly figure out how to tax crypto, one needs to figure out what their cost basis is which brings up some more challenges. Calculating the basis for any crypto can be a challenge. It’s not hard to figure out what the initial basis in a crypto is. For example if you used $5,000 U.S. dollars to purchase Bitcoin (BTC) then your initial basis for the investment is the flat $5,000. Pretty straight forward and makes a lot of sense. That’s pretty much where the easy part ends though because beyond the initial basis, calculating crypto can be an absolute nightmare and is not for the faint of heart. Let us show you what we mean.

Trading Cryptos

The confusion starts to happen and things become complicated when investors start exchanging one crypto for another. With the addition of so many new types of cryptos hitting the exchanges on a daily basis (it seems) there are a lot of cryptos that can’t be purchased using a flat currency like the U.S. dollar. Instead, the U.S. dollar needs to be used to purchase a crypto like Bitcoin (BTC) or Ethereum (ETH) and then those cryptos are used to trade for the new crypto in question that can’t be purchased using flat currency. If you are trying to calculate a basis for a crypto then these types of exchanges in crypto are important to understand and calculate. What we see here is that one capital asset is being disposed to acquire and purchase another. Whenever this happens, a taxable event is created because you disposed of the first crypto and now there is a new crypto that will need it’s initial basis calculated.

But how does one do that when during the entire process no cash has been exchanged? And how does one take into consideration the tumultuous swings of the crypto market? On any given day Bitcoin may trade for $5,000-9000 with wild swings in between. The new crypto you are trying to purchase or trade for may swing between $9000-12,000 or $2.00-7.50 with everything in between. Depending on when the exchange was made, those numbers can vary greatly and so far the data recovered from different exchanges is not that helpful or even sufficient to really pinpoint what the exchange rate between USD/BTC was when the trade was made. It’s made savvy investors make their own ways of trying to keep track of the exchange rate (for many, they use the days closing prices). Even still though, some investors use that method to calculate basis, and some don’t. That’s part of the problem. There is no one rule or one method that is being used across the board as a standard calculation.

Recording a basis

One of the pros of using cryptocurrencies is that it’s unregulated and gives some anonymity. One of the major cons of using cryptocurrencies is that it’s unregulated and gives some anonymity. The crypto exchanges have not been robustly reporting information. Why should they though, they haven’t been regulated or monitored up to this point which is part of the appeal for some people, but part of the problem for other people. Because no one is quite sure how to include exchanges or regulate them, they currently aren’t considered a broker by the SEC.6045 and investors can’t use 1099’s like they would for other situations to help them reconcile their cost basis information. We’re sure at some point quickly in the future new software or programs will be developed that can help crypto investors compile their holdings and tax information using exchange data and other public sources of information but right now, we are all still trying to wrap our heads around crypto and it’s still a little bit like the Wild Wild West. It’s still unclear how easy or hard it will be to analyze all the data out there and put it in a readable form that is easy for people to access and understand. It could be an impossibly complex task that results in more cost than anyone can shoulder. Who knows? Chances are, we’ll figure all this out pretty quickly and painlessly. But until we know for sure- it still is left up to the individual investor to calculate their basis and keep track of what is owed for tax purposes.

Permanent Change to the Coding

So, we’ve already discussed some of the issues that come up when frequent crypto-to-crypto exchanges happen. But there are also issues that arise that have to do with the actual asset class. They call certain transactions that happen a hard fork, and what that means is that these transactions create a permanent change to the underlying coding in the cryptocurrency’s blockchain. When this happens, it almost always necessitates the creation of a very distinctly separate cryptocurrency. These types of permanent changes to the underlying blockchain coding can happen for different reasons but the fact still remains that once a hard fork happens, there will always be two separate and distinct cryptos afterwards. One crypto will have the old blockchain ledger attached to it and the new crypto will have a new blockchain ledger attached.

One school of thought suggests that these hard forks ought to be treated like a traditional stock split. The idea would be that the existing crypto is going to be split in two. This tactic doesn’t seem to be well accepted by the IRS however and the existing Secs 355 and 368 of the United States tax code for corporate securities do not invite cryptos to be recognized as a security. Time will tell if changes to the tax code will be implemented that changes this. Either way though, if an investor takes this approach then they would not instantaneously recognize income on the newly formed crypto. Instead, the basis would be split between the two and the investor would track the market value of both following the split.

One could argue that a hard fork offers a receipt of a new asset, which could be helpful in calculating basis. This argument can be made because the assumption is that the new asset or crypto that results after a hard fork will have some different characteristics than the original. This assumption leads one to easily calculate the opening market value of the new crypto and matching initial basis where the original basis of the old crypto would remain unchanged.

There has also been one additional school of thought that suggests applying a zero basis to the new crypto following the hard fork. The thought behind it is that no one is sure whether or not a new market for this new crypto will ultimately emerge after a fork and the volatility of the crypto markets makes assigning it an immediate value at inception difficult. That’s why even the American Bar Association Section of Taxation is claiming that all of these factors lead one to believe that there is no value in a new crypto following a fork. If you assign a new value of zero after a fork it creates no taxable income and establishes a basis of zero, which makes accounting simpler. Even still though- having three different schools of thought isn’t helping the whole “streamline processes and rules” aspect of the whole crypto currency market. Whichever method you choose as an investor should be applied to all forks that happen. Establish a solid track record for applying the same principles every time so that the IRS does not misunderstand and think you are jumping back and forth depending on what tax position was going to be most advantageous to you at the time.

A little transaction called Airdrop

Who doesn’t like free crypto? We know we do. An airdrop is when users of a blockchain project get a little reward or airdrop of more crypto for participating in the project or helping with ledgers, marketing activities and so forth. This type of transaction is always considered income for tax purposes and will be treated as such. The investor will have to record it as ordinary income when received and will base the market value of the crypto on what it was when they were airdropped additional crypto. It’s a pretty cut and dry scenario that will not create too much confusion.

Using the same method all the time

Suffice it to say, the whole crypto currency market and idea is still new and in its infancy and we have a lot to figure out over time. We are sure that governments around the world are itching to figure out a well-defined tax framework so that they can get their piece of the ever-growing pie. At the moment it’s leaving investors a bit confused and left to their own devices on how to best track and report their crypto currencies. For now, we would suggest every investor sit down and figure out which method they want to use consistently to make sure they are fully reporting everything to the best of their abilities. Over time, we are pretty sure that all of these things will be worked out by the powers that be- but until then, you don’t want to be left holding the bag for what would be a very costly mistake that could have most likely been avoided.

Ether may not be a Security

The Economist on its August 30, 2018 edition wrote an interesting article: Initial coin offerings have become big business, regarding the treatment of Ether for tax purposes. Below the most interesting paragraph:

It is an open question whether ICO tokens count as securities, and whether their issuers must therefore comply with the rules that regulate stock offerings. Regulatory responses vary from country to country, says Preston Byrne, a financial lawyer and cryptocurrency watcher. South Korea banned ICOs last year, as did China, though many carry on regardless. American regulators have taken a cautious approach. In June Jay Clayton, the SEC’s boss, advised would-be ICO-issuers to talk to the agency before proceeding. But William Hinman, the SEC’s director of corporate finance, said later that month that he was not minded to treat ether, Ethereum’s cryptocurrency, as a security, because of its “decentralized” nature. Regulators in jurisdictions such as Switzerland and the Isle of Man have been offering detailed guidance on how to conduct a legitimate ICO.

How the IRS knows you owe crypto taxes

1099-K & 1099-B

If you received a Form 1099-K or 1099-B from a crypto exchange, the IRS knows all about it. They use a matching mechanism embedded in their Information Reporting Program (IRP).

Taxpayers with proceeds of more than $20,000 in a tax year, and with 200 transactions in a crypto exchange, get a Form 1099-K tracking proceeds every month. All exchanges have to comply. One copy of this form is forwarded to you, and another goes to the IRS. Once you refrain from including the same in your tax return, the IRS Automated Under reporter (AUR) automatically flags you for underreporting, and you will receive a CP2000 notice. The same goes for a Form 1099-B.

Exchanges like Coinbase and Kraken and the likes all report to the IRS. If you receive a tax form from your exchange, the IRS already has it as well.

Subpoenas

The IRS used subpoenas to order several crypto exchanges to force them to disclose user accounts.

Schedule 1 virtual currency question

The 2020 tax season introduced the Schedule 1 crypto question: ‘at any time during the year, did you receive, sell, exchange or otherwise acquire any financial interest in any virtual currency?’

The question is broad. You will have to answer ‘yes’ even if you just hold a small number of crypto in your exchange or wallet. Your ‘yes’ answer would alert the IRS to check the various forms and schedules for your return for cryptocurrency gains and losses even though not everyone who answered ‘yes’ had any reportable tax events. Anyone who just held crypto over the course of 2019, would have zero taxable events. In these cases, the IRS will use your answer to gather aggregate data about US crypto holders – and to keep an eye on you for future reference.

Do not try to deceive the IRS. It will cost you dearly

In 2018 Coinbase had to disclose approximately 13,000 user accounts which included taxpayer identification numbers, names and birth dates, addresses and records of account activity.

The IRS hired consultants to crackdown on cryptocurrency tax evasion

Statement of work

The IRS sent out a Statement of Work (SOW) on May the 12th, 2020, and it spells trouble for taxpayers who are cryptocurrency tax non-compliant. The SOW requests independent consultants to help the agency to crack down on non-compliance. Included amongst those the IRS contacted for help, are tech companies in the crypto-software space.

Now the IRS can compile a full tax profile on crypto users

The agency is looking for support in reconciling crypto gains and losses reported by taxpayers in their filing. The IRS will now also get access to software that will systematically collect crypto transaction data from exchanges, wallets, API keys, blockchain data, and other sources. The data will be compiled and combined to present a complete tax report for the taxpayers under consideration.

When the reports are compared with the information disclosed on the taxpayer’s filing, these taxpayers will be engaged in conversation about their compliance and more audits. No one is included. The IRS is targeting small taxpayers to the most sophisticated traders.

Ramifications

It seems that the IRS has finally gone through the perception barrier. The agency now fully comprehends the cryptocurrency space, and this means that they correctly know that crypto exchanges are merely the starting point for their subpoenas. That is where they will begin their clampdown on tax evasion. The fact is that the IRS is now developing phase two of their effort through the leverage of software to get a full account of individual taxpayer’s profiles.

It’s not too late

At this point, there is no evidence to suggest that the IRS had required any crypto tax software companies to disclose their user data to them. Non-compliant users could still find high-quality tax software and come into voluntary compliance before the IRS goes after them.

How Cryptocurrency Investors Can Radically Reduce Their Taxes

Some say it is un-American to pay tax to fund the big government, but the majority of Americans will agree that spending more than you are due is certainly not part of their value system. For those among us who agree, the word ‘loophole’ has a special sound to it.

ACT 22 of 2012 – To Promote the Relocation of Investors to Puerto Rico

One of these beautiful loopholes entitles taxpayers of Puerto Rico who qualify for Act 22 to pay 0% federal taxes on earned income and capital gains.

Just Tell Me How To Qualify

First off, you have to spend at least 183 days per year on the island and suffer its hot sunny climate. If you do, you will be eligible for a bona fide residency to Puerto Rico. As long as you can pass a criminal background check, you are cleared to file your application with the IRS, which can be a bit costly and can range from $5,000 to $12,000. And to show your bona fides you are, you are required to make a $5,000 annual donation to one of the approved Puerto Rico nonprofits and voila, no more income taxes for you!.

More?

Puerto Rico is not only about summer holidays and a magnificent ocean. It has become a real cutting-edge technology nerve center that is believed primed for the much anticipated next cryptocurrency bull-run. Today many members of the crypto-community live in Puerto Rico, and this is hugely beneficial for those who seek an entrance into the world of crypto.

Who’s Who?

One of the most controversial members of the blockchain-community is Brock Pierce. According to Pierce as much as 1,000 members of the blockchain industry had located to the island. According to Pierce, the blockchain community is making a difference on the island. They are partly responsible for stimulating the real estate market by purchasing property and taking up rental space, and they spend a lot of money on food and leisure. Also, he contends, they are using their entrepreneurial flair to support and improve the ability of the Puerto Rican food system to withstand disruption when interruptions occur during disasters or crises.

The Naysayers

Skeptics argue about the so-called trickle-down effect championed by Pierce. According to them, stimulation and investment in the local economy have no value for the residents, and according to them, the IRS loophole is not achieving what it set out to do. It is unsurprising that the government of Puerto Rico vehemently disagrees with the naysayers. According to three government studies done over the last four years, it concluded that ACT 22 has a clear and present – and positive – impact on the local economy.

The IRS Wants You

Dealing with the IRS is never easy, and it can be a real nightmare if you own cryptocurrency. If like most Americans at this point, you are not yet reporting your annual gains-and losses to the IRS you are moving on dangerous ground. It is the consensus amongst professionals that you have to report. With the exponential increase of online tracking tools and tutorials that educate traders on how to file their taxes, now might be the time to tackle this time-consuming task. Sooner or later tax policies and enforcement will catch up with the blockchain industry/cryptocurrencies. There is no getting away from the IRS!

Complicated and Variable U.S. Cryptocurrency Tax Laws

To further stir complication, cryptocurrencies are classified as the property in the United States, making them subject to capital gains tax in the same way this would apply to real estate. Income levels influence capital gains tax and ‘short-term’ and ‘long-term’ are defined by the length of time the asset is held by the owner. Further to this, different rates are applied to each classification.

Cryptocurrency investors that are battle-scarred from their losses in the past year, can claim up to $3,000 against these losses on their tax bills, just by locking in the realized cryptocurrency losses. If the losses exceed that limit, the difference can be carried forward to the following tax year. The carried over losses can also be used to offset potential tax gains in the next year’s tax assessment, should the cryptocurrency market swing around into a bull-run.

It is advised that cryptocurrency investors talk to a certified public accountant with a strong understanding of capital gains tax law and experience in the sphere of cryptocurrencies. This may prove challenging since the cryptocurrency field is a relatively new one, and is paired with complex technologies, but it will be worth the effort to find one and ensure that your cryptocurrencies are in good hands in the very important area of your individual tax.

Unrealized Crypto Losses in the US Amount to Almost Two Thirds

Credit Karma, a credit-monitoring services company, has assessed that US citizens have lost as much as $5 billion on their cryptocurrency investments, but only about 33% of these will become realized losses, being an estimated amount of about $1.7 billion.

Individual US taxpayers investing in cryptocurrencies usually establish a cost basis for tax purposes. The sale of an asset also triggers a taxable event. The appreciation or, in the case of 2018, depreciation of the asset at the time of sale, determines the individual’s tax impact. Gains or losses on assets are only on paper until they are sold, so they cannot be claimed by an individual taxpayer in their return but they may still show these in their investment portfolios.

Jagjit Chawla, the General Manager of Credit Karma, is of the opinion that one of two scenarios could be the reason for this low rate of tax claims. The first is supported by data suggesting that US taxpayers might not understand that taxable events that lock in unrealized losses only occur on the sale of the assets, and the second scenario is that some investors in cryptocurrencies are determined to HOLD them no matter what. Jagjit leans towards the first scenario in this instance.

He explains as follows: “Even though those who sold their bitcoin at a loss can typically claim a tax deduction, we found that before taking our survey, 61% of respondents who lost money on Bitcoin, didn’t actually realize they could get a tax deduction for bitcoin losses.”

Participants in a survey seemed unsure, in general, about claiming for their losses, believing that these losses were not significant enough to make a difference. Other participants were not aware of the requirement to file their losses on cryptocurrencies with their tax returns.

How To Use Leverage in Cryptocurrencies And Take a Tax Deduction

Since assets are never taxed before you sell it, it makes sense to use some of your cryptocurrency as collateral to borrow cash. This way you gain liquidity without incurring a current tax bill. It is not without risk of course. Digital currencies are price volatile and vulnerable to theft by hackers.

The Borrowers

Borrowers seem eager to leverage crypto profits into cash. Cryptocurrency lenders report increased volumes, with Genesis Capital handing out loans of more than $1.1 billion and Nexo reportedly lending out $330 million since launching in August 2018.

Nexo is a Swiss-based company with affiliates in Delaware, the Cayman Islands, and Estonia, conducts its lending business from their office in London, England.

What The ‘Experts’ Say

Conventional lending experts consider the digital-lending environment risky. Lenders often abruptly appear in the market connected to global networks of affiliates and subsidiaries with a patent lack of transparency and evasive responses to queries ad to where and how the borrower’s digital currencies are stored and protected against hackers. It certainly seems risky.

The Risk

The risks seem obvious. Whenever you leverage a loan on risky underlying assets, you are entering the danger zone. To add fuel to the fire, these global lenders are free from SEC, and CFTC oversight and those that admit to regulation are governed by non-banking oversight agencies. Moreover, the SEC is mute on crypto-backed cash loans.

The Volatility

Bitcoin gained value from $1,300 in April 2017 to $19,100 in December 2017, providing huge gains for early investors that could be used as collateral for cash loans. However, what goes up, must come down again, or so the adage warns, and since December 2017 the market bottomed out before surging back to about $4,100 in recent days.

The Loans and Tax Consequences

To carry the risk of volatility the borrower provides between 20 and 50% more cryptocurrency than they borrow, for loans from $500 to $ 2 million, for periods of up to a year. Interest rates vary greatly, and peak at about 16%.

If the prices of the cryptocurrency fall during the period of the loan, the borrower has to provide more collateral, or the crypto will be sold. In the meantime, the lender also has the option to secretly lend out the pledged cryptocurrency, something the IRS would probably consider as a sale taxable to the original owner who pledged it as collateral.

Where Are The Lenders Keeping My Pledged Currency?

According to reports, some lenders are depositing the collateral at regulated custodians like PrimeTrust, but not all lenders do this. The SEC is investigating company SALT Lending for example, in respect of $50 million in ‘digital tokens’ they sold to borrowers.

The Trend

It seems that the borrowers are those who gave up on their dream of a virtual currency for the lure of cash, and the borrowing craze is partly driven by creative market making by lenders who argue that the tax perks provided could even benefit investors who made significant paper losses on their cryptocurrency.

The Lending Pitch and Tax Advantages

According to Zac Prince of Block, one strategy to benefit even after making paper losses would be to sell, then to repurchase the currency, and to then borrow against it. According to Prince, this would trigger a deductible loss of about $3,000 per year for the investor while holding on to the currency for long enough to reach the capital gains rate of 20% down the line.

Another point the lenders make is that this form of borrowing is free from credit-scoring. This has been the way executives have been leveraging their equity assets into cash without selling it and paying capital gains taxes, for a long time.

Tax Tips for Cryptocurrency U.S. Investors

Most jurisdictions, including the United States do not yet give crypto legal tender status, but that may be changing. Crypto seems to be a significant player in the investment marketplace and is causing countries around the world to question their regulatory status and try to race to build a framework that both regulates and answers all of the legal questions that have popped up. In fact the IRS has had to invest some serious resources quickly to combat the rampant tax non-compliance for those who have invested in crypto and failed to pay taxes on the earnings.

Right now there are over 1,664 different cryptocurrencies with new ones being introduced almost daily. The underlying rules of the network might change and cause a “fork” in the cryptocurrency that causes a split and makes it so the owner may actually own two different crypto currencies like bitcoin cash, and bitcoin. There are derivatives like bitcoin futures, and you can bet we are only seeing the beginning and it’s already become a complex system that has left a lot of unanswered questions for those who are trying to regulate it.

The IRS issued Notice 2014-21 to try and apply some general tax principles to crypto. Some of the main points that came from that notice are:

  • Cryptos have “an equivalent value in real currency or act as a substitute for real currency”
  • IRS doesn’t view cryptos as generating foreign gain or losses for a U.S. tax return
  • Cryptos are treated as property (like stock, inventory, or personal property)
  • Taxpayers that receive cryptos in exchange for services or goods must include it’s fair market value at the time it was received in gross income
  • Exchange rate is established by market supply and demand
  • 1099 independent contractors are subject to self-employment tax if they receive cryptos for performing services
  • Cost basis is determined by fair market value in U.S. dollars on the date received
  • Record keeping should incorporate specific identification, first-in, first-out (FIFO) and the average-cost method can all be used to keep track of basis for tax reporting purposes
  • It remains unclear how to treat crypto forks for tax purposes. If it forks is it considered income? It’s income if it’s not a gift and has measurable value. How about the timing of income recognition? It’s assumed it depends whether or not the holder of the pre-fork crypto exercises control and dominion over the post-fork crypto (crypto forks are only becoming more common which is making IRS guidance a more urgent necessity on how to proceed)
  • FinCEN Form 114 says that cryptos that are held on an exchange that is foreign-based may be subject to reporting requirements. These foreign exchanges exhibit characteristics that are similar to foreign financial institutions and have custody of the users’ crypto.

Then the IRS issued a statement in 2014 that said:

The Financial Crimes Enforcement Network [FinCEN], which issues regulatory guidance pertaining to Reports of Foreign Bank and Financial Accounts (FBARs), is not requiring that digital (or virtual) currency accounts be reported on an FBAR at this time but may consider requiring such accounts to be reported in the future. No additional guidance is available at this time. [“IRS Says Bitcoin Not Reportable on FBAR (for Now),” Forbes (June 30, 2014), available at tinyurl.com/yav9z88v]

Regardless of what it says above, we suggest you err on the side of caution and report any foreign exchange accounts. Getting stuck with a huge bill and penalties that you aren’t prepared to pay is no walk in the park. Unless the IRS comes out with specific guidelines that indicate otherwise-report it. Save yourself the trouble.

The IRS has a dedicated task force that spends their days sniffing out tax fraud from crypto currency. So all of the money launderers out there that have been using blockchain technology to launder money should be on notice. The IRS considers virtual currency as a taxable asset and added it to their list of compliance campaigns. One of the largest exchanges out there, Coinbase has already provided the IRS user data that includes social security number, name, account activity and date of birth. It’s only a matter of time before the IRS will issue summonses to other exchanges besides just Coinbase. If you are caught not complying, there are civil penalties that include:

  • Failure to file a tax return under Sec. 6651(a)(2): 0.5% per month of the unpaid tax, up to 25% of the unpaid tax.
  • Failure to file Form 8938: Base penalty of $10,000 per failure to report an applicable asset, with an additional $10,000 for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000.
  • Failure to file FBAR: Base penalty of $10,000 per failure to report an account per year; increasing, if the failure is willful, to the greater of $100,000 or 50% of the total balance of the foreign financial account per violation.
  • Accuracy-related penalty under Sec. 6662: 20% or 40%.
  • Failure to file a tax return under Sec. 6651(a)(1): 5% of the unpaid tax per month, up to 25% of the unpaid tax.
  • Civil fraud penalties under Sec. 6651(f) or 6663: 75% of the unpaid tax.

If you haven’t filed your taxes for your crypto holdings, you may want to reconsider your course of action because the above list doesn’t even include criminal charges for tax evasion or whatever other crimes you can be charged with.

The IRS wants to help tax payers play ball and welcome any noncompliance individuals to come forward voluntarily and disclose their noncompliance. They have tried to streamline their procedures for compliance. They are trying to offer fairly easy processes to file delinquent or amended tax returns to fix the error of non-disclosure and resolve any outstanding penalty or tax obligations. This is only available to those that did fail to report their foreign income as a result of willful conduct. It’s probably the only time the IRS will allow an individual to claim ignorance to the law. If failure to comply is deemed criminal or results in huge penalties, then the streamlined compliance procedure is not an option for the taxpayer in question. It should be noted that voluntary disclosure does not necessarily grant immunity from prosecution, but it may result in the IRS being more sympathetic and not recommending prosecution. Also, you’ll still be stuck with the penalty. Unless you could sway the IRS that there was a good reason for your non-disclosure (which is unlikely, and ignorance isn’t a good reason).

Obviously what is best for each and every taxpayer will vary by each person’s situation and personal circumstances. It’s probably a safer route to voluntarily disclose and fix the non-compliance rather than waiting to be caught red-handed. Clearly we need more guidance from the IRS on cryptocurrency and all of the issues that surround the digital currency world, and it’s certain that such guidance will be coming. After all, the IRS wants their piece of the pie. Cryptocurrency is still new and growing and evolving quickly. You can rest assured that the powers that be will figure out how to regulate it and make sure individuals are compliant.

Common Crypto Tax Pitfalls To Avoid

Reporting only losses and tax-friendly transactions

Crypto holders often report significant losses (bear markets) but then avoid reporting gains entirely during bull markets. The IRS may flag this behavior and penalize you for it. Similarly, when a crypto-mining operation never makes a profit and keeps on reporting losses for years on end, the IRS can easily decide that the enterprise is not a ‘trade or business’ and deny all deductions, something that can cost thousands of dollars. Never overstate your losses and deductions. The IRS uses benchmarks with which they will compare your numbers to industry trends as well as your past return data.

No records or incomplete records

Don’t do crypto if you cannot keep an almost perfect record of your transactions. Your tax returns demand full disclosure based on comprehensive records. Generally speaking, you have to retain all your records for at least three years.

  • If you do not file a return, you have to keep your records forever
  • If you filed a fraudulent return, you HAVE TO KEEP your records FOREVER
  • If you did not report the income you should have (if it’s more than 25% of the gross income shown on your return), you have to keep your records for at least six years.

It is vital to use high-quality crypto software to calculate your crypto capital gains and losses and to guarantee that all your source data collects in one place. Do not take the view that your accountant is responsible. The responsibility to prove the amounts reported to the IRS is yours, as is the burden.

It’s as easy as that. Do the above, and you will most likely stay off the IRS radar forever.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.

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Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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