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.
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.
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.
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..
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.