Warning Signs the IRS Could Accuse You of Using Cryptocurrency to Evade Taxes

Warning Signs the IRS Could Accuse You of Using Cryptocurrency to Evade Taxes

Hey there! Have you jumped on the cryptocurrency bandwagon? Bitcoin, Ethereum, and other digital currencies are super hot right now. Lots of folks are making money trading and investing in crypto. But if you’re not careful, crypto could get you in trouble with the IRS. The taxman is cracking down on people using crypto to avoid paying taxes. Let’s talk about some red flags that could trigger an audit or criminal charges. I don’t want you to end up in legal trouble over crypto!

Not Reporting Crypto Transactions

This is a big no-no. The IRS treats crypto as property, not “real” currency. That means you owe capital gains taxes when you sell or trade your crypto for a profit. If you don’t report these transactions on your tax return, the IRS will get suspicious. They can track crypto transactions on the blockchain, you know. So even if you don’t tell them, they’ll eventually find out. Yikes! Make sure to report all your crypto buys, sells, trades, etc. Better to be safe than sorry.

Claiming Crypto Losses You Can’t Prove

Lots of people lost money when crypto prices crashed. If you claim capital losses on your taxes, you need to prove them. Keep detailed records of your cost basis, sale price, fees paid, etc. The IRS may ask for documentation. If you can’t back up the losses, they could accuse you of tax fraud. Not fun. Cover your behind and keep good records.

Not Paying Taxes on Crypto You “Earn”

If you get paid in crypto for goods/services or receive crypto as a reward (like mining), that counts as taxable income. Even crypto airdrops are taxed. Report it and pay your taxes, or the IRS could bring down the hammer. Don’t try to fly under the radar.

Shady Crypto Tax Preparers

Watch out for sketchy tax prep services claiming they can help you avoid crypto taxes. Some say they have “IRS-approved” retirement accounts to shield your crypto. Lies! Others peddle complex schemes to hide crypto profits offshore. Avoid anything that sounds illegal or too good to be true. Work with a reputable CPA knowledgeable about crypto taxes.

Using Crypto to Hide Money

The IRS is wise to people using crypto to conceal income or launder money. If you transfer large amounts of untaxed cash into crypto, they’ll get suspicious. Ditto if you have way more crypto than your reported income justifies. And if you fail to file FBAR reports on foreign crypto accounts, look out! The IRS may think you’re stashing coins overseas to dodge taxes.

Shady Crypto Transactions

Certain crypto activities seem shady and could trigger an audit:

• Private coin mixes or tumblers that obscure transaction sources
• Structuring – Making multiple small crypto transactions to avoid reporting requirements
• Transacting with blacklisted crypto wallets flagged for criminal activity

The IRS is targeting people who use crypto for potentially illegal purposes. Be smart and avoid anything sketchy.

Amending Past Returns

If you realize you didn’t report crypto properly in previous years, amend your returns ASAP. It’s better to fix mistakes yourself rather than wait for the IRS to find them. You’ll still have to pay back taxes, interest and penalties. But it’s not as bad as criminal tax evasion charges! Get your past returns in order before the IRS comes knocking.

What To Do If You Get an IRS Letter

The IRS has been sending warning letters to crypto holders about back taxes owed. If you get one, don’t panic. Carefully review your past returns and if needed, file amended returns. You may owe more taxes, but coming clean voluntarily looks better than ignoring the IRS. If you receive a criminal tax evasion notice, stop everything and call a tax attorney immediately. Don’t try to handle it yourself!

Avoid Crypto Tax Pitfalls

Whew, the IRS means business when it comes to crypto! Stay in their good graces by:

• Reporting all crypto transactions properly
• Keeping detailed records to support tax return info
• Filing FBAR reports if you have foreign crypto accounts
• Working with a knowledgeable crypto CPA or tax attorney
• Amending past returns if you find mistakes
• Avoiding anything illegal or shady tax-wise

I hope these tips help you steer clear of trouble! Crypto is cool but not worth breaking tax laws. Stay smart and honest with your crypto taxes. Let me know if you have any other tax questions!

References: [1] [2] [3] [4] [5] [6]