Tax Problems

Crypto-currency Audit

Unlike other assets, cryptocurrency record keeping can be a challenge, and the IRS is counting on you having incomplete documentation.

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“Make no mistake about it, cryptocurrency audits are on the rise. Don’t face a cryptocurrency audit alone.”

- Alyssa Maloof Whatley

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Pro Tip:

Crypto is currency.

The United States’ official position on cryptocurrencies is a little different than that of other nations. Your crypto holdings are classified as property and currency and subject to capital gains taxes. The government sees every sale or exchange of property as a taxable event.

Am I At Risk For A Cryptocurrency Audit?

With its unprecedented growth, cryptocurrency has created huge portfolio volatility for even small scale investors. If you haven’t been adequately tracking your cryptocurrency transactions, you may have put yourself at risk for an audit by the IRS.

Adding to the angst is the reality that crypto record keeping can be complicated. Different exchanges, different wallets…it’s a lot. Unlike traditional stock trades where everything is consolidated by a broker onto a single reporting form, in crypto, it’s your responsibility to consolidate your holding information and calculate your taxes that are due.

Surviving a crypto tax audit requires partnering with an experienced tax attorney who understands the crypto market and the technology that drives it. You also need a tax resolution expert who knows the ins and outs of audits and negotiating with the IRS on behalf of their client.

How Long Should I Keep My Cryptocurrency Records?

Although the IRS has been slow to ramp up enforcement and auditing of cryptocurrency transactions, auditing activity is on the rise. To protect yourself, you should plan to maintain your records indefinitely.

It’s smart to have all your cryptocurrency records translated into U.S. dollars.

A complete record will include:

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Value

The basis value of your cryptocurrency when acquired

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Transactions

Any instances where you used crypto to buy a product or service

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Exchanges

Exchanged one type of crypto currency for another

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Sales

Sold a product or service for cryptocurrency

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Earnings

Earned crypto currency via airdrop, mining, staking, or lending

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Pro Tip:

Keep thorough records.

Knowing that audit activity is increasing, being proactive about an audit is the best early defense strategy. By keeping accurate transaction records, you minimize your exposure to paying back taxes, penalties, and interest on the taxable value of your crypto holdings.

From left to right, Alyssa Maloof Whatley, Harrison Kulp, and Kiara Maxie

“The best time to prepare for a cryptocurrency audit was the day you purchased your first coin…but if you have gaps in your transaction history, now is the time to get professional assistance to make sure all your cryptocurrency activities have been properly disclosed for tax purposes. ”

- Alyssa Maloof Whatley

How Does The IRS Know I Sold Or Exchanged Crypto?

Starting in 2023, Crypto reporting will be subject to the same traditional broker information reporting rules as securities meaning that any platform on which you can buy and sell cryptocurrency will have to report the transaction to the IRS on form 1099.

There’s also that “virtual currency” question on the 1040 that was added in 2019. Failure to answer honestly about your crypto activities on your tax return is considered perjury.

Suffice that crypto isn’t an “invisible” transaction and the IRS is serious about enforcing compliance with all applicable tax laws.

Is Buying Or Selling Crypto An “Audit Trigger”?

The short answer is “no,” buying or selling cryptocurrencies won’t necessarily trigger an audit. However, if a 1099 is reported and you failed to properly report the transaction, it could automatically trigger a CP2000 under reporter notice. The IRS does expect taxpayers to maintain accurate records and self-report all crypto transactions.

Because cryptocurrency is considered property in the United States, any time you buy, sell, or exchange virtual currencies, it’s a potentially taxable event. You need to report your transactions — calculating the difference between the purchase cost (basis) and the adjusted cost basis – on IRS Form 8949.

If the IRS plans to audit your cryptocurrency transactions, it’s in your best interests to speak with a qualified tax attorney who can help you get your records in order and negotiate with the IRS on your behalf.