The International Revenue Service (IRS) is increasingly focusing on cryptocurrency tax audits to ensure no tax dodgers slip through the tracks. Even if you’re well-versed in cryptocurrency investments and transactions, you may not fully understand how to protect yourself from such a situation and that’s where the help of a cryptocurrency accountant can help. 

A new question was added to individual income tax returns for 2020 that asks taxpayers whether or not the taxpayer “received, sold, exchanged, or otherwise disposed of any financial interest in any virtual currency”. Though this question seems pretty straightforward, there are some complications that you should be aware of when answering that question.  Thankfully, our team of well-versed cryptocurrency accountants is here to help you through this increasingly important topic.

Who Is Selected for a Cryptocurrency Audit?

The IRS typically targets those that they believe didn’t report the full amount of cryptocurrency taxable income in a given year. This means they suspect that the individual did not pay enough taxes to cover their transactions. In some cases, the IRS will randomly conduct a cryptocurrency audit. Standard audits cover your last 3 years of tax returns, but the IRS may go back as many as 6 years if they believe that you’ve underreported your taxes by at least 25%. 

Regardless of the reasoning behind the audit, it is up to the individual to prove that the tax returns in question are accurate. Otherwise, the taxpayer will have to correct the taxes and pay the IRS unpaid amounts plus interest. 

How Crypto Tax Audits Work

Audit requests vary, but there are standard preliminary questions that the IRS will ask you. Make sure to respond in a transparent and organized manner when responding to these notices.

It’s typical for the IRS to require you to disclose all of your accounts including wallet IDs and blockchain addresses that you own. They’ll also ask for all digital currency exchanges (DCE) and peer-to-peer (P2P) facilitators.

The IRS will also seek the date and time of each transaction, the basis and fair market value of each unit at the time of the transaction, the date and time of sale, and the explanation of the accounting method. More expansive questions may be used in some cases, and the IRS may follow up with additional questions based on your submissions. 

You may need to consult a qualified cryptocurrency accountant in order to make sure that your accounts are in order and are not missing any critical information.

Tips to Avoid a Cryptocurrency Audit

If you’re aware of the specifications ahead of time, you can reduce your chances of being audited by the IRS. First of all, you’ll want to ensure that all of your cryptocurrency earnings are reported accurately and in a timely manner. 

Always double-check your cryptocurrency tax calculations and returns for accuracy, something that our team is happy to help you with! If you work with one of our cryptocurrency accountants, we will make sure you have the supporting detail necessary to handle an audit if the IRS were to come knocking.. 

How Our Experts at Founder’s CPA Can Help

If you’re looking for seasoned cryptocurrency accountants in the Chicagoland area, your search stops with our team at Founder’s CPA. We have $500+ million in tracked crypto and we’ve helped support over 100 different assets. For a risk-free assessment with one of our experts, get in touch with us online.

Curt Mastio
Post by Curt Mastio
Apr 22, 2022 10:15:44 AM
Curt Mastio started Founder’s CPA in 2017 and currently serves as the Managing Partner of the firm. After obtaining both his Bachelor’s and Master’s degrees in accounting from the University of Illinois in Urbana-Champaign Curt started his career in Big Four public accounting. Shortly thereafter Curt served as the Chief Financial Officer of Storage Squad began his stint as an Adjunct Instructor at Northwestern University’s Farley Center for Entrepreneurship and has been teaching Accounting & Finance to undergraduate students for 6+ years. In his current role Curt oversees strategy, operations, and business development at Founder’s CPA. Further, Curt has experience working directly with 200+ startups and small businesses providing accounting, tax, and outsourced CFO services. His industry expertise lies in the SaaS, Blockchain, Marketplace, and Fintech industries. He has served as a key advisor working directly with startups that range from pre-revenue to companies generating over $30 million dollars a year in revenue. Lastly, he serves a key role working directly with the firm’s clients that have collectively raised over $200 million in venture capital funding to date. Curt is also an active advisor, mentor, and investor in the startup ecosystem. He has facilitated numerous workshops, webinars, and presentations to incubators and other startup-centric organizations. He is also an active mentor for Techstars in both Chicago and Iowa. Outside of his daily professional duties Curt is actively involved with Beat the Streets Chicago and was a founding member of its Young Professionals Board. His efforts in both leadership and community involvement were recognized when he was awarded the Illinois CPA Society’s Outstanding Young Professional Leadership Award in 2020. He was also a panelist at their annual conference in 2022 where he spoke about his experiences starting and operating a public accounting firm. He maintains an active Certified Public Accountant designation that he obtained in 2014. Outside of work, Curt can be found spending time with his friends & family including his dog Rufus. His hobbies include golf, boating, cooking, reading, and attending sporting events & concerts.