“What happens if you don’t report cryptocurrency on taxes?” is a crucial question for any trader or small business involved in crypto. Whether you trade Bitcoin, stake Ethereum, or earn crypto income, unreported activity opens you up to the risk of steep fines and even criminal charges.
Staying compliant with ever-evolving crypto tax laws is complex, especially for newcomers to the crypto world. It’s advisable to work with a specialized crypto CPA to help you navigate the rules successfully, remain compliant, and optimize your tax bill.
What Are the Consequences of Unfiled Cryptocurrency Taxes?
There are potentially grave consequences to failing to report cryptocurrency taxes on income, trades, or capital gains. It equates to underreporting taxable income.
The IRS treats cryptocurrency as property, not as currency. This means that every trade, sale, or exchange of crypto generally triggers a taxable event. Not disclosing these events can result in severe consequences depending on the extent and intent of the noncompliance. These include:
- Penalties: Unreported income from crypto transactions may result in payment penalties of 20% of the underpaid amount plus accumulated interest.
- Audits or investigations: The IRS and other tax agencies are increasingly using blockchain tracking tools to identify unreported wallets and transactions. Suspicious activity could lead to an audit or formal investigation.
- Criminal charges: Cases of possible crypto tax evasion where large sums or intentional concealment are identified will likely lead to criminal prosecution. Penalties include large fines or even imprisonment.
- Loss of credibility: Non-compliance will impact your financial standing and damage your reputation with tax authorities, making future negotiations or settlements more difficult.
Failure to report even minimal involvement with crypto trading risks facing problems down the line, even if mistakes occur unintentionally. The consequences will depend on whether the IRS deems a case to be willful tax evasion.
Taxpayers who receive cryptocurrency earnings or hold crypto assets must be meticulous with reporting crypto on their tax return. Working with a specialist in crypto CPA services is the best way to keep on the right side of crypto tax rules and avoid mistakes that result in stressful encounters with the authorities. They will also work strategically to reduce your tax liability within the limits of the law.
Evasion of Assessment vs Evasion of Payment in Crypto
Assessment evasion in crypto involves concealing or misrepresenting income to prevent taxes from being calculated accurately. Payment evasion involves hiding or avoiding payment of taxes that have already been assessed. Each type of cryptocurrency tax evasion carries different legal implications and penalties.
Evasion of assessment is considered a more serious offense, as it directly impacts the government’s ability to determine how much tax is owed. However, intent is key in both cases. Honest mistakes or poor recordkeeping will likely be put down to negligence, not evasion. Though negligence comes with penalties, taxpayers can take corrective action before their situation escalates into a criminal matter.
Attempting to evade or defeat tax is a felony, with a maximum fine of $100,000 for individuals ($500,000 for corporations), a maximum prison sentence of five years, or both (page 19 of the PDF).
How Does the IRS Communicate With Taxpayers About Crypto?
The IRS uses Letter 6174 to outline the reporting requirements for taxpayers with cryptocurrency accounts. Receiving this letter doesn’t automatically mean you have unreported crypto income. Rather, it’s a reminder to adjust your tax return to reflect all of your crypto transactions. There’s no need to respond to this letter if you don’t have any outstanding transactions to report.
Letter 6174-A is a follow-up letter with another reminder of your crypto reporting requirements. Again, there’s no need to take any action if you meet all the IRS’s reporting criteria.
The IRS will send Letter 6173 if they’ve found evidence to suggest you’ve failed to meet your reporting obligations. You must respond or send an amended return that reflects all your crypto activity. Your CPA will advise you on the best course of action if you have already reported all of your transactions or if transactions have slipped through the net.
How to Deal With Unreported Cryptocurrency Transactions
Mistakes sometimes happen when reporting taxes. This is especially true for crypto, as the rules surrounding correct filing are complex and continually evolving. However, mistakes or omissions must be rectified as soon as possible to minimize costly penalties.
Step 1: Identify Past Mistakes or Omissions
The first step will be to identify where you went wrong with your past tax returns. This involves understanding crypto taxes, including what constitutes a crypto taxable event, and which taxes correspond to each type of transaction:
| Crypto Event | Description | Tax Owed | How It’s Taxed | Example |
| Selling crypto in exchange for fiat | Exchanging cryptocurrency for government-issued currency like USD, EUR | Capital Gains Tax | Capital gains charged on the difference between sale price and the cost basis. | You purchased one coin for $5,000 and sold it for $10,000. Taxable gain of $5,000. |
| Crypto trading | Exchanging BTC for ETH, for example | Capital Gains Tax | Each trade is considered a sale of one asset and the purchase of another at FMV (in USD). | Someone exchanging 1 BTC for $3,000 worth of ETH would report the taxable gain or loss on the BTC. |
| Using crypto to buy goods or services | Paying for regular products or services using cryptocurrency instead of fiat | Capital Gains Tax | Taxed on the difference between the crypto’s market value when it’s spent and your cost basis. | Purchased 1 ETH for $1,000 and then spent it when it was worth $1,500. Taxed on $500 gain. |
| Receiving crypto as work or business payment | Earning crypto as salary, freelance payment, or as business income | Ordinary Income Tax | Taxed as regular income based on the fair market value on receipt. | Received 0.5 BTC worth $5,000 for freelance work. $4,000 taxable income at the ordinary income tax rate. |
| Staking rewards | Earning rewards from staking, lending, or yield farming | Ordinary Income Tax | The fair market value of tokens received when credited to your account. | $400 in staking rewards earned in ADA = $400 taxable income. |
| Mining rewards | Earning crypto by validating transactions on a blockchain | Ordinary Income Tax | Taxed as income when received. Selling will trigger capital gains/losses. | Mining $15,000 of BTC would create $15,000 of taxable income. |
| Airdrops | Receiving crypto from a project promotion on a network upgrade | Ordinary Income Tax | Taxed at the airdropped tokens’ FMV when they’re received or accessible. | 50 tokens worth $100 create $100 in taxable income. |
| Hard forks | Receiving new coins after a blockchain fork | Ordinary Income Tax | The new coins’ FMV when received | 1 BCH worth $200 creates $200 of taxable income. |
| Gifting crypto | Giving crypto to another person as a gift | No immediate tax for the giver | The recipient may owe capital gains tax when selling. Gift tax may also apply to large amounts. | Gave 0.5 ETH as a gift. No immediate tax consequences unless the gift goes above the annual gift limit. |
| Donating crypto to a charity | Giving crypto to a nonprofit organization | Tax-Deductible Donation | No capital gains. Able to deduct fair market value if donated to a qualified charity. | Donated ETH worth $2,000 to a qualified charity. May claim $2,000 deduction on their taxes. |
Step 2: Collect Relevant Documentation
Gather all documents relevant to your digital transactions. This will include details of any gains or disposals of your crypto assets. Use these as a basis to file an amended tax return for any years you want to change. Your CPA will help you with this process and make arrangements for payment of any tax owed.
It may also be worth speaking to a specialist tax attorney at this point if you’ve received letters from the IRS about non-compliance. Look into the voluntary disclosure program (IRS Voluntary Disclosure Practice (VDP)) if you think your past errors could be considered serious enough to warrant an audit. Taking this step often leads to reduced penalties.
Step 3: Submit an Amended Income Tax Return
Taxpayers can amend a single tax return or multiple years. Follow these steps to amend your individual income tax return:
- Secure a copy of your original return: Have a copy of your filed tax return and any supporting documents on hand.
- Complete Form 1040-X (Amended U.S. Individual Income Tax Return).
- Explain any changes: Clearly state what you’re changing in Part III of Form 1040-X and explain why.
- Attach supporting documents: Submit any new or amended W-2s, 1099s, schedules, or forms that support the changes made.
- Submit the amended return: You can file electronically or mail the form directly to the IRS address listed on the form.
- Pay any additional tax owed: Paying promptly will reduce interest and penalties.
- Track your amendment: Track its status on the IRS website to ensure you don’t miss any updates. Amended returns typically take up to 16 weeks to process.
Important note: You may need to amend your state tax return, too.
Step 4: Keep Meticulous Records Going Forward
The IRS now asks about digital assets directly on the front page of Form 1040. Ensure your records are audit-ready each year. Accurate recordkeeping, including timestamps, amounts paid or received, fair market values, and transaction IDs, is essential for future filings. These records will also help you defend your position if questioned.
Using crypto tax software is a great way to automatically calculate crypto gains and losses. Consulting a tax professional is also recommended before engaging in complex activities like staking or yield farming.
How to Report Crypto and NFT Operations on Your Tax Return
Reporting crypto on your taxes is straightforward using Form 1040. However, take your time to ensure accuracy to avoid costly mistakes down the line.
Step 1: Respond to Questions About Digital Assets
Check “Yes” on Form 1040 to the question of your ownership of digital assets if you’ve bought, sold, or exchanged crypto or NFTs.
Step 2: Report Capital Gains or Losses
Carefully list every sale, trade, or NFT transaction on Form 8949. Many crypto exchanges now provide a CSV or Form 1099-B (though not all do). Taxpayers are still responsible for accurate reporting even without a form. Detail information, including purchase and sale dates, proceeds, and cost basis, before summarizing the totals on Schedule D.
Step 3: Report Income
Earning cryptocurrency or NFTs as payment for goods or services or from mining, staking, or airdrops must be reported as ordinary income on Schedule 1. Self-employed traders will report their crypto income using Schedule C. This includes income from mining, staking, or NFT creation done as part of a trade or business.
Step 4: Report NFT Activity
NFT sales must be treated like any other property. Report profits or losses on Form 8949/Schedule D. Creator royalties or minting income must be reported as ordinary income.
Step 5: Keep Detailed Records
Always maintain detailed logs of your wallet addresses, transactions, fair market values, and fees paid. Keep a log of NFT royalties and gas fees. You may be able to deduct them as business expenses. Meticulous records will improve the accuracy of your crypto tax reporting and ensure you deduct everything you can.
Stay on the Right Side of Crypto Tax Law
Unfiled cryptocurrency taxes quickly escalate into serious legal and financial problems. Whether your omissions were accidental or intentional, taking corrective action early often reduces penalties significantly.
The best way to avoid problems with crypto tax enforcement is to prevent mistakes in the first place. Work with a qualified crypto CPA to understand your obligations, maintain accurate records, and stay compliant as crypto tax regulations evolve.
