Cryptocurrency transactions have increased exponentially in recent years. According to the Wall Street Journal, “The volume of cryptocurrency transactions grew to $15.8 trillion in 2021, up 567% from 2020, in a sign that the trading of digital assets is becoming increasingly mainstream.” The growth in the NFT market, the metaverse, and an increasing number of companies accepting crypto as a form of payment have led the average crypto investor to ask more questions than ever about crypto tax liabilities.
In this article we take a closer look at taxable liabilities related to crypto, tracking and calculating the cost basis of your crypto investments, and what happens if you fail to report your crypto transactions to the IRS.
Do I Owe Crypto Taxes?
As a crypto investor you may be wondering how much tax, if any, you owe to the IRS when it comes to your crypto activities. While you are not taxed for owning crypto, there are multiple taxable events that can occur for crypto investors. Here are some common examples:
- When you sell crypto for cash you realize a gain or loss on your crypto property
- Using crypto to purchase goods or services
- Buying one cryptocurrency with another cryptocurrency (i.e., using Bitcoin to buy Ethereum)
- When you receive mined crypto
- Being paid by an employer in crypto is taxable as income
- Receiving crypto rewards including staking rewards and interest earned
- Getting crypto from a hard fork (depends on how the asset is used, as well as other factors)
- Getting an airdrop—even if it’s part of a marketing campaign or giveaway
- Receiving crypto for goods or services you sold
Beware: No 1099 B Forms—You Must Track the Cost Basis Yourself
Unlike stock trading platforms such as Robinhood and E-Trade, most crypto exchanges, including Coinbase, don’t provide you with a 1099 B Form. The infrastructure bill passed by the U.S. Congress in November 2021 requires cryptocurrency exchanges to issue 1099-B Forms—but that doesn’t start until the 2023 tax year.
Until then it’s your responsibility to calculate your own cost basis on capital gains and losses related to crypto activities. The IRS provides guidance about the records you must keep for tax reporting purposes, but the language is somewhat general.
For many crypto investors, the idea of tracking and calculating their cost basis accurately is rather daunting. As a solution, some crypto investors are adopting crypto aggregator tax software programs in an effort to streamline the process. Most of these programs make it easy to integrate gains and losses into your tax return. However, these programs aren’t able to confirm the accuracy of the calculations like a tax expert can.
What Happens If You Do Not Report Your Crypto Transactions?
Before you entertain the notion that you can somehow avoid responsibility for taxable crypto events, it’s important to recall your IRS From 1040 from 2019. You will notice on its cover a question asking whether you have “bought, sold, or exchanged an interest in virtual currency?”.
While many taxpayers assume the IRS is only interested in larger audits due to limited staffing, the consequences of not reporting your crypto transactions could be severe. Failing to report these transactions can result in IRS penalties, interest, and even criminal charges.
Remember, while the IRS has a three-year lookback for errors, there is no statute of limitations in cases of fraud. Plus, whistleblowers often report fraudulent activity to the IRS in exchange for a percentage of the penalties collected.
Goldin Group CPAs Does the Heavy Lifting of Crypto Tax Filings
At Goldin Group CPAs, our firm specializes in staying up to date on all the legislative updates related to crypto taxation. We help you aggregate all your crypto transactions, determine your cost basis, and ensure your tax return is filed properly to avoid any IRS compliance issues.
For more information on cryptocurrency taxation, contact Ariel Goldin, CPA, Director of Client Relations at firstname.lastname@example.org.