Have you ever wondered what happens if you don’t file your crypto taxes? Well, there are consequences to misreporting or a complete lack of reporting your taxes on taxable transactions, including cryptocurrencies.
Today, we are covering what happens if you don’t file crypto taxes, explaining the current landscape of taxation rules and reporting requirements, including clarifying commonly asked questions about crypto tax reporting.
Do I have to file crypto taxes?
Yes. You have to report your gains/losses from crypto trading and report any income you earn from crypto-related activities, besides answering the “crypto question” on the top of the first page of your Form 1040.
How do taxes work on cryptocurrency?
In the US, if you trade cryptocurrencies, you have a taxable event, subject to capital gains taxes. These taxable events include any trade of crypto-to-crypto, crypto-to-FIAT, crypto swaps on decentralized exchanges, etc. Any sale of crypto will lead to a capital gains scenario. Additionally, when you spend your crypto to pay for goods/services, you’ll also be subject to capital gains taxes.
Other crypto activities such as receiving a hard fork, airdrops, crypto interest, staking rewards, new tokens through yield farming, or your salary in crypto will be treated as income. These items will be subject to ordinary income taxes instead of capital gains taxes.
How do I report income from cryptocurrency?
You need to report the Fair Market Value (in USD) of the crypto you received in activities as airdrops, crypto interest, staking rewards, crypto salaries, or yield farming at the time of your receipt on your income tax return.
If you trade crypto, you’ll have to determine the gain/loss on each trade and report it on Form 8949 and Schedule D of your tax return. If you have a profit at the end, you’ll likely pay capital gains taxes in the US.
Find out more on how to report crypto taxes.
What happens if you don’t file cryptocurrency on taxes?
If you don’t file crypto on taxes, you’ll likely be audited, get a letter from the IRS with taxes due, need to pay interest and penalty, or in more severe cases, face legal action.
In the US, you have reporting obligations regarding cryptocurrencies, and if you don’t comply, you’ll have to face the same legal consequences as if you misreported or don’t file taxes in general.
Do you have to report crypto if you don’t sell?
In short, no. If you only buy crypto with USD and hold it without ever selling, you won’t have to report any capital gains or income. However, you still have to answer the “crypto question” on IRS Form 1040. If you only bought crypto and didn’t sell, you can answer “No,” given the changes made to the 2021 form.
Anytime you receive compensation in crypto, you need to report income as we stated above, and any time you sell crypto, you need to determine gain/loss on the trade and report it.
Can the IRS track cryptocurrency?
Yes. The IRS has many ways and tools to track cryptocurrency activity.
Recently, thousands of crypto investors received letters with amounts due in taxes related to crypto activities since the IRS has the ability to track crypto. If you received one of these letters, a crypto tax CPA could help you correctly access the amount you really need to pay and make sure you’re compliant from that moment forward.
Does Coinbase report to the IRS?
Coinbase has been issuing Form 1099-K to some of their customers for the past few years, and they will continue to issue 1099. Crypto exchanges in the US like Coinbase could be enforced to transmit data of users to the IRS as it has happened in the past because of anti-money laundering initiatives and to track taxpayers who don’t file their crypto taxes.
Do all crypto exchanges report to the IRS?
An exchange in the US can be obliged to transmit information about users to governmental entities, including the IRS. Under the new law passed recently, it looks like all the US based exchanges will need to issue some kind of tax reports to their customers and the IRS.
Do I pay taxes on crypto if I lose money?
You might if you traded crypto and had a profit but then traded more and had losses, you’ll still have to pay capital gains taxes on the trade where you had a profit. Let’s see an example.
You bought 1 Bitcoin at $10K. You’ll later sell that Bitcoin for $20K. Later, you buy 1 Bitcoin again at $22K, and then it drops sharply, and you sell it at $15K.
In the first trade, you had a $10K profit, leading to capital gains taxes. The tax rate will depend on your holding period. If the trade of Bitcoin at $20K happens after 12 months of holding it, you’ll have a long-term capital gains tax rate, ranging from 0% to 20%. If you hold it for less than 12 months, you’ll have a short-term capital gains tax rate, ranging from 10% to 37%.
In the second trade, you had a loss of $7K. Since you had a profit before, you can offset this loss from the $10K gains you had before. If these were the only trades you did during the tax year, the capital gains would only be $3K instead of $10K, but you still have to pay taxes even though you also had a loss.
Can you write off stolen crypto?
In the US, you won’t be able to claim a loss for stolen crypto. According to the current tax law, stolen crypto is considered a personal casualty loss, which is no longer tax-deductible. Find out more about taxes on stolen, hacked, or lost crypto.
Learn how to create tax reports with CoinTracking:
Autor
Moritz
Crypto Tax Manager
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.
Tax Expert, Webinar-Host, Content Creator, Crypto Enthusiast and Investor. Interested in everything regarding the crypto space.
As a seasoned tax expert and enthusiast with a comprehensive understanding of cryptocurrency taxation, let's delve into the key concepts covered in the provided article.
Reporting Obligations:
The article emphasizes that individuals must report gains/losses from crypto trading and any income earned from crypto-related activities. Failure to report these transactions can lead to serious consequences, including audits, IRS letters, interest, penalties, and potentially legal action.
Taxable Events:
In the U.S., various crypto transactions constitute taxable events. This includes crypto-to-crypto trades, crypto-to-fiat exchanges, decentralized exchange swaps, and even spending crypto on goods/services. Each sale of crypto triggers a capital gains scenario.
Income from Cryptocurrency:
The article categorizes different crypto activities and explains their tax implications. Income from activities such as airdrops, crypto interest, staking rewards, yield farming, and receiving a salary in crypto is subject to ordinary income taxes, not just capital gains taxes.
Reporting Requirements:
To comply with tax regulations, individuals need to report the Fair Market Value (in USD) of received crypto in various activities. For trading crypto, determining gain/loss on each trade and reporting it on Form 8949 and Schedule D of the tax return is essential.
Consequences of Non-Compliance:
Failure to file crypto taxes can result in audits, IRS letters demanding taxes, interest, penalties, and in severe cases, legal action. The legal consequences are emphasized, emphasizing that reporting obligations for cryptocurrencies are treated as seriously as any other tax requirements.
No Sale, No Reporting (with a caveat):
If an individual only buys crypto with USD and holds it without selling, they may not have to report capital gains or income. However, they still need to acknowledge the possession of crypto by answering the "crypto question" on IRS Form 1040. Any compensation received in crypto or any future sale triggers reporting requirements.
IRS Tracking of Cryptocurrency:
The article asserts that the IRS has multiple tools and methods to track cryptocurrency activities. Recent instances of crypto investors receiving letters from the IRS for unpaid taxes underscore the effectiveness of the IRS's ability to monitor crypto transactions.
Exchange Reporting:
Coinbase is highlighted as an example, issuing Form 1099-K to some customers. The article suggests that U.S.-based exchanges may be compelled to issue tax reports to customers and the IRS, aligning with recent legal changes.
Taxation Despite Losses:
Even if an individual incurs losses after initially making a profit from crypto trading, they may still owe capital gains taxes on the profitable trades. The tax rate depends on the holding period—long-term or short-term.
Stolen Crypto and Tax Deductions:
Stolen crypto is deemed a personal casualty loss in the U.S., and according to current tax laws, it is not tax-deductible. The article encourages readers to explore more about taxes on stolen, hacked, or lost crypto.
Additional Resource:
The article concludes with a mention of CoinTracking, a tool to create tax reports. The author, Moritz, is introduced as a Crypto Tax Manager, Tax Expert, Webinar Host, Content Creator, and Crypto Enthusiast and Investor, indicating a wealth of expertise in the crypto space.
In summary, the provided information offers a comprehensive guide to understanding the tax implications of cryptocurrency transactions, emphasizing the importance of compliance and the potential consequences of non-compliance.
