Because more and more exchanges are coming to the crypto market, a lot of Americans discover the benefits of crypto trading and enter the world of crypto. What a lot of people don’t know, though, is that crypto activity has to be reported to the IRS. Unfortunately, U.S. citizens may be very reluctant to do so as they worry about possibly having to pay more taxes.
So, why should you report your crypto activity, and what happens if you don’t?
How Do Cryptocurrency Taxes Work?
When you exchange cryptocurrency or sell it at a profit, it may be subject to capital gains. Buying something and using cryptocurrency as payment, exchanging it for U.S. dollars, or swapping digital coins are all things that may be taxable.
The loss or gain represents the difference between the basis or purchase price and the value of the crypto when exchanging or selling. On top of that, your tax rates will be based on the ownership length.
For instance, depending on your taxable income, if you had digital assets for over one year, you may be able to qualify for capital gains rates of respectively 0%, 15%, or 20% in the long-term.
But there are a lot of cryptocurrency investors that sell crypto or exchange it more frequently. This is what results in short-term capital gains. Then, they get levied at regular income tax rates.
If the reports from digital currency exchanges are too limited, then it will also be very difficult to figure out the basis for calculating your cryptocurrency tax bill.
Taxable and Non-Taxable Crypto Activity
A lot of transactions made in cryptocurrencies should be reported to the federal government. Not all of them are subjected to this, though. For this reason, a lot of individuals are confused about preparing their taxes.
Well, when it comes to investing in cryptocurrency and making crypto transactions, it is important to know that they are taxed similar to stocks. So, any capital gains and losses should be reported. Common activities that require reporting to the IRS are:
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Trading a cryptocurrency for a different digital currency
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Selling your cryptocurrency for cash
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Paying for a merchant’s products or services
You may also have to report certain events as income if you received payment in crypto form. For instance, you will have to report:
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Mining cryptocurrency or staking it
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Getting airdropped tokens from a hard fork
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Receiving payment in crypto form
Based on how you used cryptocurrency, you can report it as both income and property.
As for non-taxable crypto events, they include the following:
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Giving cryptocurrency gifts (except for very large gifts, which would then trigger certain tax obligations)
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Purchasing cryptocurrency
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Transferring like for like assets between crypto exchanges
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Making cryptocurrency donations (this event is tax-deductible)
You should keep in mind that even if certain events are not taxable, they should still be reported on your tax return. You may qualify for the itemized charitable deduction by doing so.
Why You Should Report Your Crypto Activity
Not filing your crypto activity could lead to an IRS audit. This will result in penalties, interest, and in some cases, criminal charges. When you don’t file your crypto activity, it will be considered tax fraud or evasion.
With lower staffing, there may be lower chances of IRS inspection. But the agency may still seek larger money amounts.
Everything should be disclosed to the IRS, no matter what. Even though the error lookback of the IRS is a three-year one, when it comes to fraud, there isn’t any statute of limitations.
Also, if you do not report crypto activity to the IRS, someone who knows about it could report this missing activity to the IRS. Former spouses or business partners may end up doing this in order to collect a part of the penalties.
The Bottom Line
Your crypto activity should be reported to the IRS no matter what. Even if you have a long history of crypto events or you’re engaging in crypto activities now and then, you should not refrain from reporting it to the IRS unless you’re ready to face the consequences. The last thing you want to deal with is an IRS audit. Avoid it by reporting your crypto activity.
