Guest post courtesy of CPA Exam Guy Bryce Welker
Tax day is quickly approaching and those who hold cryptocurrencies need to take a moment and review transactions and holdings from the 2018 year. Whether you sold crypto, bought it, or traded it, it’s important to provide any pertinent information regarding digital currencies to the appropriate governing authorities.
It’s clear that the IRS is taking crypto more seriously than ever before. It might even make sense to reach out to a professional, such as a CPA, for help. You can find out more about what a CPA does at CPA Exam Guy.
The vast majority of cryptocurrencies aren’t completely anonymous. Bitcoin and most digital currencies record every transaction on a ledger which is accessible to the public. Armed with this knowledge, the IRS could potentially use the tools at their disposal to connect your Bitcoin and other digital currency addresses to you.
Therefore, it’s wise to report all your cryptocurrency activity on your taxes. Whether you sold millions of dollars worth or a lifelong hodler, be sure you’re providing the IRS with all the information they need about your digital currencies.
IRS is Getting Serious About Crypto
Image source: Wikimedia Commons
As Bitcoin and cryptocurrency become a larger and larger part of our economy, it makes sense that the IRS would want to get involved. There have been a few significant watershed moments over the past few years that reveal just how serious the IRS is about reporting cryptocurrency on your taxes.
But that’s not all. The U.S. is spending significant money on tracking crypto along with how its used or traded. With that in mind, it’s imperative that you report your cryptocurrency on your taxes when you file.
U.S. Goes All In on Cryptocurrency Tracking
Public records have shown that the United States government is spending millions of dollars on contractors to perform blockchain analysis. This involves connecting an individual’s cryptocurrency funds to their identity. If you thought the government wasn’t taking an interest in the goings on in the cryptocurrency community, you thought wrong.
The U.S. government has no shortage of tools and resources at their disposal to connect individuals to their cryptocurrency transactions. Some digital currencies do provide a level of anonymity for their users. However, the vast majority leave a large enough trail that investigators can pinpoint the person to whom a particular wallet belongs.
When a cryptocurrency user exposes their digital wallet address to an individuals or service who can determine their real-world identity, they present that possibility of their wallet belonging to them. This is the exact method through which the government plans on using blockchain analytics experts to aggregate the information.
Image source: The Blue Diamond Gallery
Usually, these types of lapses in privacy happen when a user withdraws or deposits their funds using a cryptocurrency exchange that requires some type of identity validation process. However, it might also be due to a person posting their crypto wallet address online under their real name or by using an easily identifiable pseudonym. Additionally, this information can easily be gathered by buying or selling to a person who has already been identified.
IRS Top Spender in Blockchain Analytics
To the surprise of no one, the Internal Revenue Service (IRS) is the top spender in blockchain analytics among all U.S. government agencies. This agency, which is responsible for gathering federal income taxes, has nine signed contracts with forensics providers which specialize in blockchain analytics.
Altogether, these nine contracts total just over $2 million, which represents nearly 40 percent of the total amount the U.S. government spends on blockchain analytics services.
The purpose of spending so much money on blockchain analytics is to unmask those who are not accurately reporting crypto investments on their federal tax returns.
Subsequently, the IRS has chosen to ramp up their enforcement of violations in the crypto asset class. They’ve even gone to the extreme of taking well-known crypto exchange Coinbase to court to force the platform to provide them with consumer data.
The branch of the U.S. government that spends the second most in blockchain analytics might surprise you. You might think that it makes the most sense for the Securities and Exchange Commission (SEC) to be in this pot, but that’s not the case. Neither is the Drug Enforcement Agency (DEA) or the Federal Bureau of Investigation (FBI).
Instead, it’s the Immigration and Customer Enforcement (ICE) who is the second-biggest spender on blockchain analytics in the U.S. government. This branch focuses on enforcing U.S. immigration laws along with investing criminal activity which involves foreign nationals who reside in the country.
ICE has the same number of blockchain analytics contracts as the IRS with nine, however, these total a little less, coming in at around $1.5 million. The FBI is, however, third, with 12 contracts that total a little over $1 million.
Comparatively, the SEC, the section of the U.S. government which monitors the securities and exchange markets, has totaled less than $200,000 in blockchain analytics. This is especially surprising considering the charges the commission has filed against various ICO operators and cryptocurrency scammers.
Play Time is Over
If this time of spending by the U.S. government should tell us anything, it’s that it is no longer overlooking the weight that cryptocurrency carries. Just like with any other governing authority, the IRS plans to get its portion of any gains you realized throughout the year.
Just as a reminder, the IRS announced five years ago that they consider cryptocurrency as a property. That means that any type of sale of your digital currencies should be shown as a capital gain or loss on your taxes. So whether you’re purchasing goods or services with your Bitcoin, or selling your cryptocurrencies, you need to report it on your taxes.
In case you’re not taking the IRS seriously, just remember that it won an important court case against Coinbase just a few years ago. The result of the case forced the exchange to provide the U.S. government with the information of over 14,000 users who had performed transactions exceeding $20,000.
Given the fact that there were less than 1,000 filings that reported cryptocurrency in 2015, it’s safe to say that not a lot of people are taking the edict from the IRS seriously. However, it’s important that you don’t neglect to file your crypto on your 2018 taxes since there are serious repercussions otherwise.
What Happens if You Neglect to Report Your Crypto?
Let’s say you decide to ignore the warnings from the IRS and try to hide your profits or capital gains on your taxes? First of all, you wouldn’t be alone, as nearly one-third of U.S. citizens don’t report their crypto capital gains and losses on their taxes. Keep in mind, however, that what you’re doing is intentionally committing tax fraud.
Should you go this route and avoid reporting your crypto gains and losses, the IRS has a few penalties it can and will enforce. The most severe, which includes criminal prosecution, is typically used in only the most extreme cases of tax fraud. However, these tax evaders can expect to spend up to five years in prison and get hit with a $250,000 fine.
Additionally, those who knowingly choose to falsify their tax returns and intentionally choose not to include their crypto information can have a fine of up to $250,000 levied against them by the IRS. Taxpayers who choose not to report their cryptocurrency transactions face the potential for audits, which could result in penalties and interest for undisclosed information.
It can be challenging to keep track of all your cryptocurrency transactions throughout the year, however, the fines alone should be enough to encourage you to do your best. You may or may not have access to a 1099 from each exchange detailing your crypto profits and losses throughout the year. Additionally, if you bought goods or services with your crypto, you’ll have to account for that on your own.
Despite how complex and difficult tracking your crypto transactions can be, you’re still held accountable if you don’t fully comply with the guidelines laid out by the IRS. If you choose not to, you could be facing a large fine, and possibly even time in prison.
Let Cointracking.info take Care of your Crypto Taxes
If you need help with tracking your Bitcoin or altcoin transactions, visit Cointracking and let them help you out. This tool is a great way to determine your crypto profits and losses so you’re completely prepared when it’s time to do your taxes. We can also help you:
Importing (API & CSV) your trades from 100+ exchanges/wallets.
Support for DeFi trades.
Importing your Binance Chain and Binance Smart Chain trades.
25+ reports, including which coins are tax-free based on holding periods.
Automatic Gains calculations with the choice of 12 accounting methods (e.g., FIFO, LIFO, HMRC, ACB).
Generating Tax Reports compliant in your country.
Remember that the IRS has shown it’s willing to go to great lengths to find and prosecute those who are attempting to keep themselves in the dark when it comes to reporting their crypto capital gains and losses. Head on over to Cointracking to ensure you’re providing the government with the crypto information they need.
This article is from Bryce Welker of cpaexamguy.com.
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Disclaimer: All the information provided above is for informational purposes only and should not be considered as professional investment, legal, or tax advice. The views above only represent the author and not CoinTracking. You should conduct your own research or consult with a professional financial advisor when investing.