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Understanding and preparing for cryptocurrency audits

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

Cryptocurrency continues to grow in popularity as an investment opportunity. While the audience for crypto was once limited to those with technological expertise, consumers can now buy and sell bitcoin at banks and ATMs. As more Georgia residents get involved with virtual currency, they should consider the tax implications of their investment and how to prepare for a cryptocurrency audit.

Corporate cryptocurrency audits

The blockchain technology that supports cryptocurrency is a public ledger of transactions. In theory, this virtual structure allows auditors to track the ownership of every coin. However, the anonymity of the system can hamper cryptocurrency audits.

It is not always clear who owns the digital key related to a coin, and stolen or copied keys can result in errors. In the worst case, this situation can lead to exchanges that overreport the amount of crypto they hold.

Individual cryptocurrency tax implications

Individuals who get involved with crypto must realize that it is not as anonymous as it was in the beginning. Because the investment has gone mainstream, the IRS has developed ways to track digital wallets and assign them to individual taxpayers.

Many transactions that happen through a broker or crypto exchange will result in a report to the IRS. As a taxpayer, you may receive a record of the exchange through Form 1099-B or Form 1099-MISC.

Other transactions are your responsibility to report. Like other investments, cryptocurrency generates capital gains and losses, and you must acknowledge these amounts on your income taxes.

Individual cryptocurrency audits

Keeping accurate records is critical for those involved in cryptocurrency. An IRS audit will require that you can reliably demonstrate your crypto income and losses. Tax software designed for crypto can help provide a clear account of each exchange.

The IRS is working hard to get a handle on this new investment technology. Maintaining transparency at the time of every cryptocurrency transaction will prevent penalties when you file.