If you’ve been following the news lately, you may be seeing some storm clouds on the horizon for crypto markets. Between the recent IRS lawsuit against Coinbase and any of the several SEC enforcement actions the agency has taken against ICOs, it looks like the crypto community should be gearing up for a challenging regulatory environment.
Cryptocurrency investors of the past were able to make coin trades and investments in a more-or-less free market atmosphere. However, this is no longer the case. The Feds are ramping up financial law enforcement from all angles, and they’re keeping a keen eye on cryptocurrency. This should be particularly concerning to anyone who has failed to properly report their crypto investments on their tax returns. The IRS can go back several years to prosecute cases of tax evasion, so even if you disclose your reportable crypto trades this year, you still may be in line for an audit.
If you forgot to – or didn’t know you had to – report your cryptocurrency investment on any of your prior years’ tax returns, you need a good accountant. A skilled and licensed Certified Public Accountant can help you prepare their returns this year and remedy any past errors that may land you in hot water with the IRS. Happy Tax customers have access to a talented group of cryptocurrency accountants specially trained in the tax rules that apply to virtual coin traders. The easy-to-use Happy Tax app can connect you with a cryptocurrency-trained Certified Public Accountant who can help you prepare your 2017 tax returns and figure out how to smooth over any past errors.
Nearly All Crypto Activity is Taxable
Many crypto traders have fallen back on some popular myths regarding tax liability that has been recycled online for years. For example, some people still falsely believe that they can shelter their coin trades from the IRS through the Section 1031 like-kind exemption rule. While some accountants who are not as up-to-date on IRS policies may advise that this is possible, this is not how the IRS deals with cryptocurrencies. Rather, the IRS treats coin-for-coin trades as a sale immediately followed by a purchase, similar to selling your Microsoft stock to invest in Apple instead. This does not qualify as a like-kind exchange exempted from tax liability under Section 1031 of the Tax Code.
The perpetuation of this myth and others like it has led to a potentially dangerous situation for crypto investors who did not disclose their taxable trades to the IRS on past years’ returns. The IRS can audit your tax returns up to three years under normal circumstances. If you failed to report more than one-quarter of your income on a prior years’ return, the IRS will go back up to six years to check for other inaccuracies. And even worse, making knowingly false representations regarding your income on your tax returns is a federal crime with no statute of limitations. This means that the IRS can prosecute you for fraud or tax evasion for financial decisions that you made so long ago you can hardly even remember.
The long arm of the IRS can reach anyone, and this should make crypto investors nervous. However, some coin traders shrug off the risk. Instead, they rely on the anonymous nature of cryptocurrency transactions to protect them from an audit or – even worse – a tax evasion charge. Unfortunately for them, however, this belief is incorrect. Placing too much faith in the privacy protections afforded to cryptocurrency transactions has already landed a few people in jail, and no doubt there will be more cases to come.
You Can’t Run, and You Can’t Hide
Of course, neither you nor anyone you know cheats on their taxes. But for the sake of argument, imagine that some people out there are intentionally misreporting their crypto income because they believe they can never get caught. After all, cryptocurrency transactions are anonymous and untraceable, right? Wrong.
Unlike working with a bank or third party financial services provider, most coin exchanges do not require you to submit identifying information. You can trade cryptocurrencies without disclosing your legal name, address, or other information that is usually required by banks under policies designed to combat financial crimes. This lack of identifying information may lull some investors into a false sense of security when it comes to transacting anonymously. However, despite popular belief, all crypto transactions are traceable to some degree. That’s because the time, amount, and wallet address of virtual currency transactions are registered on the blockchain. Most blockchains create a public ledger of all virtual currency exchanges to ensure that cryptocurrency can’t be counterfeit. But it’s not like the Feds can use this information to track you down, right? Wrong again.
Granted, your cryptocurrency transactions may not be linked to your personal identity like they would be if you used more traditional financial services. But that does not mean it’s impossible to connect your identity to your online activities. Rather, federal investigators have a pretty good record of building these links through the same investigative tactics they use to hunt down other cybercriminals. Ross Ulbricht, forever known as the infamous Dread Pirate Roberts on the now-shuttered online black market “the Silk Road,” was captured and convicted on this very basis. And, in a fascinating twist to the story, two federal agents who had worked on the case went down with him. They also relied on some inaccurate beliefs regarding anonymity when they were attempting to hide stolen coins from their colleagues.
Amend Inaccurate Returns As Soon As Possible
Skilled investigators can link your identity to your public wallet key through research and good police work. And once they do, they know every coin transaction you’ve ever made on the blockchain. This could expose you to substantial fines and penalties, and also possibly earn you time behind bars. Don’t risk your freedom just to try and save a few bucks, and don’t think the IRS can’t track you down if you failed to report cryptocurrency income on old returns.
Fortunately, an inaccurate return is easily fixed. If you believe your prior years’ returns do not accurately reflect your cryptocurrency income, contact an accountant to help you prepare an amended return. The skilled cryptocurrency accountants at Happy Tax have all the knowledge and resources you need to make sure your cryptocurrency investments are reported properly on your tax returns. They can help you prepare your crypto tax returns this year and review your prior years’ filings for inaccuracies that may raise red flags for an audit. If the IRS has you worried, don’t go at it alone. Instead, download the Happy Tax app today to get all the tax advice and planning services the crypto community needs.