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Cryptocurrency and tax audits

On Behalf of | May 17, 2022 | Cryptocurrency Issues & Audits

Cryptocurrency remains a popular investment option for those hoping to take advantage of potential gain. Returns on investment come with no guarantees, which is the case with scores of other assets. Unlike traditional stocks and bonds, , not every broker or service may file a 1099 for sales or transactions. Georgia crypto traders who wonder about Internal Revenue Service policies may feel surprised that the agency now takes additional steps to ensure tax obligation compliance. In other words, the IRS stands on the lookout for those not reporting their crypto earnings properly.

The IRS and cryptocurrency

Perhaps the IRS feels the honor system does not work for taxpayers reporting their crypto gains and losses. The anonymous nature of several cryptocurrency wallets may lead some to underreport gains or outright not report them. So, the IRS took steps to uncover information about crypto transactions.

For example, newer 1040 tax forms require filers to reveal not only whether they sold, mined, or exchanged crypto but also if they purchased goods with digital currency. The wording on the form even asked if the filer disposed of any financial interests in digital currency.

Answering the question truthfully is necessary. Remember, anyone signing a tax form states they are answering truthfully to the best of their abilities under the penalty of perjury.

Audit risks

Criminal charges for cryptocurrency underreporting might only affect a small percentage of filers. However, expect the IRS to engage in cryptocurrency audits to recover any tax obligations the agency feels it is owed. Of course, the IRS cannot arbitrarily assess taxes. Assessments must follow the tax code’s statutes.

The IRS must follow the law and review evidence when performing an audit. A taxpayer could prove their original form was entirely accurate. Even if the IRS disagrees, appeals might work in the taxpayer’s favor.