What happens if I don’t report cryptocurrency on my tax returns?
If you don’t, you may be in big trouble. Because when you have income from crypto transactions, you are generally legally required to report that income. As you may have already seen on your tax returns, the IRS has been asking you for the past couple of years the following question on the very first page of their Form 1040:
“At any time during the tax year (2019, 2020), did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
This means that Uncle Sam expects you to report any crypto gains and losses to pay taxes
Moreover, the IRS sent letters in 2019 to taxpayers who possibly failed to report crypto income and pay the appropriate tax. Coinbase, one of the world’s biggest crypto exchange platforms, has also begun to issue 1099-MISC forms to comply with IRS guidelines.
At this point, you might be wondering what happens if you sell minor meme coins like SHIB and SAITAMA on smaller exchanges. Further down the road, even those smaller exchanges would have to issue tax documents to you and the IRS, even for dealing in crypto that didn’t mean to be taken seriously. If and when that happens, you may face an IRS audit if you didn’t report your income and pay your taxes on time. In addition to the additional tax, you may have to pay penalties and interest.
Then how can I fix it?
Don’t worry, we’re here to help you. Let’s first figure out your crypto gains and losses for each tax year. To do that, we recommend using Cointelli’s crypto tax software. Because all of your crypto transactions from every exchange you’ve used have to be combined and reported in one form (Form 8949), it’s much easier to use our software and figure out your overall gains and losses.
Once you have your Form 8949 ready, it’s time to amend your tax return. Instead of Form 1040, you’ll submit the 1040-X.
Add your Form 8949 to the 1040-X, and then calculate any additional taxes (only if you’ve realized capital gains) on top of your original tax return. (We'll link you to our Crypto Tax Guide further down to help explain this.) If you had a loss, you can offset the previously reported capital gain or deduct up to $3,000 from your previous total income. We always recommend using tax software or consulting a tax professional when amending your tax returns.
The crypto market has been growing aggressively over the past few years, and so have the IRS’s enforcement efforts. Gathering up your crypto transaction history and accurately reporting them in the right tax form can cause you infinite frustration. You’ll definitely need a reliable crypto tax expert to stay on track with new tax laws, so check out our Crypto Tax Guide for more in-depth info from your friends at Cointelli!
Got any crypto tax questions? Ask us on Twitter! Our co-founder & crypto tax expert Daniel @Cointelli_Dan will answer you directly!