What happens if you don’t disclose crypto activity this tax season
There’s a question about “virtual currency” on the front page of your tax return, making it clear you need to disclose crypto activity. If you don’t report transactions and face an IRS audit, you may be hit with interest, penalties or even criminal charges. “You’re playing with fire if you don’t report it,” said David Canedo, a CPA and tax specialist product manager at Accointing.
The crypto ecosystem has expanded significantly in recent years. While institutions such as the IMF are starting to embrace its innovation, they are also calling for investors to exercise caution.
After recent market dips, reporting last year’s cryptocurrency profits on your tax return may be less appealing. But hiding taxable activity may lead to IRS trouble, experts warn.
In 2021, the digital asset market sailed past $2 trillion, with bitcoin peaking at nearly $69,000 in November and ether growing to almost $5,000 during the same period. While values dropped in December, many investors still had sizable gains.
And the IRS has made it clear they are watching with a yes or no question about “virtual currency” near the top of the first page of your tax return.
“That’s where the hammer comes down because they can say that you lied on a government document under penalties of perjury,” said Ryan Losi, a Richmond, Virginia-based CPA and executive vice president of accounting firm PIASCIK.
How crypto taxes work
Cryptocurrency may be subject to capital gains when exchanged or sold at a profit. Swapping digital coins, cashing out for U.S. dollars or even making a purchase may be taxable events, Losi explained.
The gain or loss is the difference between your purchase price, known as basis, and the value when selling or exchanging, and your tax rates depend on the length of ownership.
Capital gains tax rates for 2021
Long-term capital gains rate Taxable income
Single filers
0% $0 to $40,400
15% $40,401 to $445,850
20% $445,851 or more
Married filing jointly
0% $0 to $80,800
15% $80,801 to $501,600
20% $501,601 or more
If you held digital assets for more than one year, you might qualify for long-term capital gains rates of 0%, 15% or 20%, depending on your taxable income.
However, many crypto investors sell or exchange more frequently, according to a CNBC survey, triggering short-term capital gains, levied at regular income tax rates, up to 37% for top earners. What’s worse, figuring out your basis to calculate your crypto tax bill may not be easy with limited reporting from digital currency exchanges.
Marginal tax brackets for tax year 2021, married filing jointly
Taxable income Taxes owed
$0 to $19,900 10% of taxable income
$19,901 to $81,050 $1,990 plus 12% of amount over $19,900
$81,051 to $172,750 $9,328 plus 22% of amount over $81,050
$172,751 to $329,850 $29,502 plus 24% of amount over $172,750
$329,851 to $418,850 $67,206 plus 32% of amount over $329,850
$418,851 to $628,300 $95,686 plus 35% of amount over $418,850
$628,301 or more $168,993.50 plus 37% of amount over $628,300
Marginal tax brackets for tax year 2021, single individuals
Taxable income Taxes owed
$0 to $9,950 10% of taxable income
$9,951 to $40,525 $995 plus 12% of amount over $9,950
$40,526 to $86,375 $4,664 plus 22% of amount over $40,525
$86,376 to $164,925 $14,751 plus 24% of amount over $86,375
$164,926 to $209,425 $33,603 plus 32% of amount over $164,925
$209,426 to $523,600 $47,843 plus 35% of amount over $209,425
$523,601 or more $157,804.25 plus 37% of amount over $523,600
What happens if you don’t report taxable activity
If you don’t report taxable crypto activity and face an IRS audit, you may incur interest, penalties, or even criminal charges. It may be considered tax evasion or fraud, said David Canedo, a Milwaukee-based CPA and tax specialist product manager at Accointing, a crypto tracking and tax reporting tool. While the chances of IRS scrutiny are lower with limited staffing, the agency may pursue larger amounts of money, he said.
For example, there’s a big difference between buying bitcoin in 2012 and cashing out millions of dollars in 2021 versus small trades for $100 profit, Canedo said. But you still have to disclose everything regardless.
“You’re playing with fire if you don’t report it,” he said. Although the IRS has a three-year lookback for errors, there is no statute of limitations for fraud, Canedo said. Another risk is whistleblowers, who can report missing activity to the IRS for a percentage of penalties collected, Losi from PIASCIK said. “The number one way the IRS finds out about tax cheats is a former business partner or former spouse,” he said.
CNBC
