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What Happens If You Don't File Crypto Taxes?

What Happens If You Don't File Crypto Taxes

In recent years, cryptocurrency has become an increasingly popular way of increasing personal wealth around the world. Crypto assets aren't typically considered as currency or money by key financial institutions but if you use your crypto in a transaction or sell it, you are legally required to pay taxes on it. Filing crypto taxes is a relatively straightforward process when crypto tax software is involved. But if you haven’t filed crypto taxes, you may be in a boatload of legal trouble.

If you’re curious about what happens if you do not file crypto taxes, and how to go about amending your tax return, this article has got you covered.

What Are Crypto Taxes?

If you trade cryptocurrencies in the US, you have a taxable event that is subject to capital gains taxes. This includes any sort of trade of crypto-to-FIAT, crypto-to-crypto, or even crypto swaps on more decentralized exchanges.

Any type of crypto sale will result in a scenario with capital gains. Additionally, when you go on to spend the crypto when paying for goods and services, you will be subject to capital gains taxes.

How Crypto Taxes Work

You are to pay taxes on cryptocurrency if you sell it or use it in a single transaction. This is because you actively trigger capital gains or losses if the market value has changed.

To put it simply, cryptocurrency may be subject to capital gains when it is exchanged or sold at profit. Taxable events might include swapping digital coins, making a purchase, or even cashing out for U.S. dollars.

The gain or loss with capital is the difference between the purchase price (the basis) and the value when you are selling or exchanging. Your tax rates will normally depend on the length of time you have owned the crypto.

Consequences You May Face For Not Filing Crypto Taxes

In the US, you have obligations to report everything regarding cryptocurrencies. If you aren’t compliant, you may face the same legal consequences as if you had misreported or not filed your taxes at all.

Whether you forget or purposely don’t file crypto on taxes, the IRS may have reason to believe that you have committed tax fraud or tax evasion. If this is the case, there are a couple of things that may happen. We’ve outlined these below.

  • First of all, you’ll likely be audited. The standard audit period for the IRS includes the past 3 years yet there is no limit on how far back they will go with this if necessary.
  • You may then receive a letter from the IRS with all of the outstanding taxes. If this occurs, you will need to pay interest and maybe even a penalty. In the most severe cases, you might even face serious criminal charges!

Remember: the IRS has its ways of tracking cryptocurrency activity. Make sure you are clear about everything so that you do not get into any trouble.

How To Amend Your Crypto Taxes

You may be curious about whether cryptocurrency activity from the past is taxable in the first place. Unfortunately, in the majority of cases, the answer is a resounding yes.

If you have forgotten to report crypto gains on a tax return, you may be able to amend it from the year – or years – where you didn’t include them to avoid a hefty fine.

Step 1: Calculate How Much You Owe

Calculating your tax liability can be quite complicated as you must know the fair market value of your cryptocurrency at the time of each trade. If you’ve been part of thousands of trades, this can be difficult.

Step 2: Make Amendments For Your Return

After determining tax liability, you should fill out the 1040-X Amended U.S. Individual Income Tax Return form to begin the process. This is pretty easy to do provided you have updated information on hand.

Step 3: Mail Your Amended Return

After amending your tax return, mail it (and relevant supporting documents and forms) directly to the IRS. If your amendment creates a higher tax bill, include the additional tax payment with your return.

Be patient as it may take the IRS anywhere from 8 to 12 weeks to process your amendment.

Summary

If you don’t file crypto taxes, you may be seen as committing tax fraud. If this is the case you might face criminal charges or hefty fines. To avoid this, make sure to submit your tax returns with all of your crypto information along with supporting documents.

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