Who’s Most at Risk of an IRS Audit for Cryptocurrency Tax Issues?

Who’s Most at Risk of an IRS Audit for Cryptocurrency Tax Issues?

Hey folks, it’s tax season again and for those of us who own cryptocurrency, that means we gotta be extra careful about reporting everything properly to avoid getting audited by the IRS. I know taxes aren’t the most fun thing to deal with, but audits are even worse, so let’s talk about who’s most likely to get audited and how we can avoid it, a’ight?

First off, the IRS has been ramping up enforcement when it comes to crypto taxes the past few years. They’ve sent out a bunch of warning letters to coin holders and have even sought out more staff who specialize in crypto audits[1]. So if you’ve been trading coins and not reporting gains or losses accurately, you could def be on the IRS’s radar.

1099 Mismatches

One of the biggest red flags for the IRS is when the income you report doesn’t match up to 1099 forms filed by exchanges you use[1]. Like if Coinbase says you made $50k in trades but you only claim $30k in gains, that discrepancy is gonna raise some eyebrows over at the IRS.

To avoid this, make sure you download all your 1099s from exchanges and reconcile them with your own records. If there’s a discrepancy, better to amend your return asap rather than wait for the IRS to come knocking!

Large Transactions

If you’re moving around big amounts of crypto – especially to/from exchanges – that’s another trigger for the IRS[4]. They wanna know where large sums are coming from and that you’re paying taxes on ’em.

So if you sold a bunch of Bitcoin for $500k and transferred it to your bank account, you better believe the IRS will be looking into that. Make sure any large transactions are reported properly on your tax return.

Previous Audits or Warnings

Got hit with an audit before or received one of those IRS warning letters about crypto tax compliance? Then you can bet you’re on their monitoring list for future audits too[3].

If you’ve been flagged already, be extra diligent going forward. Make sure you dot your i’s and cross your t’s when it comes to reporting crypto activity. Consider hiring a tax pro too so you’ve got an expert in your corner.

No or Low Income

If you’re reporting little to no income but have significant crypto transactions, the IRS is gonna scratch their heads and wanna take a closer look[2]. I mean, the money’s gotta be coming from somewhere, right?

So if you don’t have a job but are still trading coins actively, make sure you’re showing where that money is coming from and paying taxes on any gains.

Unreported Income

Not reporting crypto income at all? Well no duh, that’s basically asking for an audit[1]. The IRS has insight into exchange records, so they’ll know if you’re trading coins and not reporting it.

Trying to avoid taxes by not reporting income is never a good idea. Just pay your taxes people! It ain’t worth the hassle of dealing with an audit.

Day Trading

If you’re actively trading crypto on a daily basis like it’s your job, that day trader status will get the IRS’s attention[4]. They’ll wanna make sure you’re paying taxes on all those short-term trades.

So if you’re a heavy trader, use crypto tax software to carefully track your gains and losses. And make sure you’re checking the box on Schedule D indicating you’re a day trader.

Foreign Accounts

The IRS keeps close tabs on foreign crypto exchanges and wallets[4]. If you’re moving coins or cash to offshore exchanges, you need to report that activity.

Failure to report foreign crypto accounts can not only lead to an audit but also penalties. So if you’re using Binance, KuCoin, or any other non-US exchanges, tread carefully.

Tax Havens

If you’re transferring crypto to known tax haven countries, that’s a gigantic red flag for auditors[3]. Panama, the Cayman Islands, etc – if the IRS sees money moving to these places, they’ll wanna know exactly what’s going on.

Bottom line, trying to hide money offshore won’t end well. Avoid tax havens completely or make sure to report any activity if you want to steer clear of audits.

Incomplete Records

One of the biggest mistakes coin holders make is having incomplete or inaccurate records of their crypto transactions[5]. Like only keeping track of purchases but not sales or trades.

If you get audited, the IRS will ask for documentation of your crypto activity. So save all your statements, transaction histories, receipts, etc. If your records are sloppy, it’s not gonna go well.

No Tax Help

Navigating crypto taxes yourself without any professional help is risky[2]. There are lots of complex rules and regulations to follow.

If you don’t have a tax pro advising you, it’s easy to make mistakes on your return. Getting advice from an expert can help avoid red flags that lead to audits.

The Bottom Line

Dealing with IRS audits is no fun, but the good news is they can be avoided by reporting your crypto activity accurately. Keep detailed records, disclose all income, and consider hiring a crypto tax pro if you need help.

I know the tax rules for crypto can be confusing, but take your time and get everything squared away. You got this! Just stay organized and let me know if you have any other questions. Happy filing everyone!

References

[1] Will Your Crypto Trading Lead To An IRS Audit? – Forbes

[2] How to Avoid A Cryptocurrency Tax Audit in 2023 – CoinLedger

[3] At Risk For A Cryptocurrency Audit? – Atlanta Tax Lawyer

[4] Tips for Avoiding a Crypto Tax Audit – ZenLedger

[5] How to Survive a Cryptocurrency IRS Tax Audit – SF Tax Counsel