To beat the IRS, you need a legal team that understands the IRS.

Cold wallets and crypto tax audits

On Behalf of | Oct 6, 2022 | Cryptocurrency Issues & Audits

Cryptocurrency stands as a new investment vehicle for many Georgia traders. Some may attempt to protect their assets in cold wallets, although they may worry about potential audits.

Cold wallets and cryptocurrency investing

Like other assets with trading and investment value, cryptocurrencies might experience price fluctuations. If the price drops, the crypto holder could lose money, but the possibility exists the price may rebound. However, it would likely be impossible to recover money outright stolen from a digital wallet. So, many cryptocurrency traders use cold wallets to store their funds.

Cold wallets store cryptocurrency offline, making it inaccessible to hackers who require a live connection to break into the wallet. This security feature makes these wallets appealing to those wishing to preserve their digital currency and keep it from prying eyes.

However, those who think they can use a cold wallet to avoid an IRS audit may find themselves in trouble. Taxpayers face requirements to report all income on their tax returns and do so accurately.

Dealing with IRS audits

IRS cryptocurrency audits involve making sure that the taxpayer filed an accurate return and noted all gains and losses. The IRS would assess additional taxes and penalties if someone underreported income or cryptocurrency gains. Of course, the audit provides an opportunity for the taxpayer to prove their return contained no inaccurate information or oversights.

An audit might involve little more than sending precise, documented evidence that supports the taxpayer’s claims. Some audits may involve face-to-face meetings, though.

An IRS representative might erroneously assess tax after the taxpayer responds, but that does not necessarily end things. The taxpayer may appeal the decision. If the initial appeal does not work, other paths exist, such as going to Tax Court.