The Truth About IRS Cryptocurrency Tax Relief and Penalty Abatement Requests

Hey there! Dealing with the IRS can be super stressful, especially when it comes to complicated stuff like cryptocurrency taxes. I totally get it – I’ve been there myself. This article will give you the real scoop on getting penalty relief from the IRS for crypto tax issues. I’ll share what I’ve learned from my own experience and from tax pros so you can get the facts. My goal here is to help you understand this process better and feel more confident navigating it. Ready? Let’s do this!

Crypto Taxes Are Tricky, But You Gotta Pay Up

First things first: the IRS sees cryptocurrency as property, not “real” currency[5]. So you owe taxes whenever you sell, trade, or even spend crypto. I know, it’s a pain. The IRS started cracking down on this in 2020 by adding a question about crypto to Form 1040[6]. Even if you just bought some Bitcoin years ago and never sold, you’re supposed to report it. Ugh. But don’t panic – the tax rules for crypto are basically the same as for stocks[6]. The key is keeping good records so you can calculate gains and losses accurately.

Mistakes Happen – That’s What Penalty Relief Is For!

Here’s the deal: the IRS knows crypto taxes are confusing. They even sent letters to crypto owners in 2019 telling them to pay back taxes and amend past returns[1]. Crazy, right? But the good news is the IRS offers penalty relief if you made some mistakes but are trying to fix them. I’ll explain the different options below, but the bottom line is you can get those penalties waived if you meet the requirements.

First Time Penalty Abatement – Like a “Get Out of Jail Free Card”

This is a great option if it’s your first time screwing up your crypto taxes. The IRS will waive the penalty as long as you’re otherwise compliant and have a clean track record[4]. One tax pro called it a “get out of jail free card” – nice! To request it, follow the instructions on the penalty notice you got. You can call the IRS or mail them a written request[4].

Reasonable Cause – For More Unique Situations

If your situation is more complex, you may need to prove “reasonable cause” for the mistakes. This is more work but doable. Write a detailed letter explaining why you made errors, how you’re fixing them, and that it won’t happen again. Provide evidence like medical bills if health issues caused the problems. Send this to the IRS office listed on the penalty notice.

IRS Penalty Relief Programs – For Multiple Tax Issues

If you have penalties across different years, look into IRS programs like voluntary disclosure. These let you get right with your taxes from previous years without fear of criminal prosecution. The IRS wants people to comply, not go to jail! Meet with a tax pro to submit your disclosure and negotiate a settlement.

How To Avoid Crypto Tax Penalties in the First Place

They say an ounce of prevention is worth a pound of cure, right? Here are some tips to avoid IRS penalties on your crypto taxes:

• Use crypto tax software to import all transactions and calculate gains/losses for you
• Consult a crypto tax pro if you have a complex situation
• Keep excellent records of all buys, sells, trades, etc.
• Report all crypto activity no matter how small
• Review your return carefully before filing
• Ask for help early if you realize you made a mistake

The Bottom Line – You’ve Got Options!

Dealing with the IRS over crypto taxes can be intimidating, but don’t panic. If you get hit with penalties, you have options like first time abatement and reasonable cause. The key is taking action quickly to get compliant and request relief. And moving forward, good record-keeping and professional help can keep you in the clear. You’ve got this! Let me know if you have any other questions.