How does the IRS view cryptocurrency capital gains? This is something you are probably asking yourself if you are planning to start trading cryptos very soon or you just got into it recently. Everyone knows that the IRS has strict policies regarding tax activity, and with cryptocurrencies gaining more traction than ever, you are wondering what you should do – especially considering there are only a few weeks left until the deadline for 2022.
Experts warn that hiding any taxable activity can result in trouble with the IRS. But is that true when it comes to cryptocurrencies? Well, if you have been wondering this, this article has the answer you are looking for.
Does the IRS Want to Know About Your Crypto Transactions?
The answer is “Yes”. The IRS wants to know about your cryptocurrency transactions, and this is also what you should check on your IRS Form 1040. The IRS will want to know whether you received, exchanged, or sold any financial interest in digital coins.
It’s important to note that the question about your crypto activity is found on the first page of Form 1040. So, this indicates that the IRS is not playing around. They are very serious about crypto activity and want to know everything.
When Do You Check “Yes” on the IRS Form Regarding Crypto Activity?
If you know what the IRS is, then you also know that you must complete all forms correctly and not hide your activity, as there will be consequences. Although you should report your crypto activity, not everything will require checking “Yes” on the 1040 form.
Fortunately, the instructions regarding whether you should check the “Yes” box are detailed and reveal when you should do it. So, the IRS form will require an affirmative answer if you:
- Used cryptocurrencies as payment for goods or services
- Mined or staked virtual currency
- Sold any cryptocurrency and realized a loss or gain
- Traded crypto for another crypto
- Received cryptocurrency amounts
When Do You Check “No” on the IRS Form Regarding Crypto Activity?
If you didn’t do any of the things above, you still have to answer the question. So, when do you check the “No” box instead?
Well, if all you did last year was to hold cryptocurrency in an account or wallet without selling it to someone or exchanging it for another crypto, you can check the “No” box. Similarly, you should give a negative answer if you did not use it to pay for any goods or services.
If you only transferred your digital currency from an account or wallet that you own to another account or wallet that you own, then you should also check “No”. And if all you did was purchase virtual currency for real currency, the “No” box will also have to be checked.
What Happens If You Hide Crypto Activity or Fail to Report It?
The IRS is always very serious when it comes to tax deadlines. This year, the IRS is asking everyone about their cryptocurrency activity, as they now consider everything, including purchasing, selling, or trading crypto, as investments. So, what happens if you do not report activity?
Failure to report may result in an IRS audit. Therefore, you may end up incurring penalties interest, and in some cases, even criminal charges. Hiding your activity or failing to report it will be considered fraud or tax evasion.
IRS audits will examine or review your financial information and accounts and check whether you reported your information correctly according to the tax laws. Furthermore, they also look at whether you reported the right tax amount.
The last thing you want is for the IRS to find out that you lied about your crypto activity or you failed to report it for any reason. You would be playing with fire.
Only in 2019, more than 10,000 taxpayers who had crypto transactions but didn’t report their income received letters from the IRS. It is better to avoid all this mess by being honest with the IRS. Also, if you receive any letter from them regarding failure to report crypto activity, treat it seriously.
The Bottom Line
Cryptocurrencies are very popular, and a lot of people trade them, but not everyone knows that they should report their gains. Failure to report crypto gains can lead to an IRS audit, and it is not the type of trouble you want to deal with. So, make sure to report your activity on time to avoid an audit.