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Cryptocurrency trading could lead to tax audits

On Behalf of | Apr 28, 2022 | Cryptocurrency Issues & Audits

Cryptocurrency has become the rage among many investors looking for windfall profits. Although volatile, Bitcoin and other digital assets come with potential gains that outweigh the risks for numerous traders. Investors need to look at the tax implications as well. Previously, the IRS did not look closely at Bitcoin profits. Today, Georgia traders must prepare their returns properly to account for any gains procured from cryptocurrency endeavors.

Cryptocurrency and audits

The IRS changed Form 1040, and newer forms ask filers if they traded in any cryptocurrency. Not answering the question truthfully could cause legal troubles. Even providing honest answers might mean trouble still looms, as the IRS may audit the taxpayer.

The IRS has sent warning letters to those it suspects did not file truthful returns by failing to disclose cryptocurrency gains. Such letters might do more than force compliance and amended returns. The correspondence could hint that an audit is coming, although the IRS may accept the submitted returns at face value.

Worries about a cryptocurrency audit

The severity of cryptocurrency audits could hinge on the monetary amount and how many years of tax returns are involved. Ultimately, someone who provides truthful financial information may avoid problems, provided they file their honest returns on time. Filing a false tax return could cause many issues, including possible criminal charges. Not reporting a substantial amount of income or investment gains from crypto might be highly unwise.

Maintaining accurate records seems advisable, as documentary evidence could refute any claims of underreported or unreported transactions. Even if the IRS does not provide a favorable decision after the taxpayer’s response, appeals may lead to a resolution in the taxpayer’s favor.