Filing Crypto Taxes

Whether you’re being audited because of your crypto, or your investments are simply complicating the situation, the objective is to prove that you filed your tax returns accurately and paid the correct amount.

Here’s how the cryptocurrency audit process works:

• The IRS will request documentation to support the information on your tax returns. This can include pay stubs, bank statements, and receipts for any expenses you claimed.
• In a cryptocurrency audit, you will also need a comprehensive report of your trading history for the relevant years.
• The audit examiner’s focus is to determine whether you reported correctly and paid the correct amount in taxes.
• At the conclusion of your audit, they will decide the amount owed. Collections won’t start immediately, and you do have the option to appeal. 
• If, during your crypto audit, the IRS suspects that you intentionally tried to hide funds or committed a tax crime, they may pass the case to the Criminal Investigations Division or the Department of Justice for prosecution.

Common triggers for a cryptocurrency audit include:

• Failing to report crypto on your tax return
• Leaving out certain exchanges or wallets from your return
• Miscalculating your capital gains or ordinary income

Many digital asset exchanges report some information about your activity to the IRS. If your tax return doesn’t match, you could get flagged. This holds true even if you incurred losses or made minimal gains.

Once the IRS starts receiving Form 1099-DA from crypto exchanges, it's anticipated that cryptocurrency audits will soar.

A standard audit covers your last 3 years of tax returns. However, if the IRS finds reason to believe you’ve underreported by at least 25%, during the audit process, they can go back 6 years.

If you’ve held crypto for several years and haven’t always reported it properly, this might happen to you.

For instance, let’s imagine you’re undergoing a crypto audit covering 2017, 2018, and 2019. When the IRS examiner reviews your records for 2017, they notice some coins were sold. They inquire about when you first acquired those coins, and you inform them you purchased the coins in 2014. 

If you didn’t report any cryptocurrency before 2017, the IRS examiner may now have reason to believe that you’ve significantly underreported your taxable income. The years 2014, 2015, and 2016 may then be subject to an audit as well.

If the IRS suspects you’ve committed tax fraud, there is no time limit for the audit. They can review records from any year.

As mentioned earlier, most IRS examiners don’t even know what Bitcoin is—let alone how it should be declared. You need a tax lawyer to:

• Guide you through the audit process
• Create an accurate crypto tax report (even if you’ve lost keys or used an obsolete exchange)
• Navigate digital asset tax law adeptly to defend your reporting methods

A crypto tax report meticulously accounts for each trade—including timestamps of when you bought and sold, the initial amount you spent on the coin, and its sale price. This data is used to calculate your capital gain or loss for each transaction. 

Other factors are also important: Long-term gains and short-term gains are taxed at different rates. Some crypto counts as income and must be reported separately. 

Assembling a proper crypto tax report can be a detailed, time-consuming task. Do not expect the IRS to accurately calculate your owed amount for you!

We’ve assisted hundreds of clients in creating crypto tax reports for previous years, even without complete records or if they've lost access to old wallets. Familiar with the law, we craft crypto tax reports that stand up to rigorous IRS scrutiny.

Numerous crypto clients haven’t reported due to the fear they can’t afford to pay taxes on crypto gains.

What most don’t understand is the audit process only focuses on determining how much you owe. You're not required to pay your full tax bill immediately after completing a cryptocurrency audit. 

You can negotiate a payment plan with the IRS. There’s almost always a payment plan or resolution option that accommodates our clients and satisfies the IRS.

Appealing your crypto audit results is possible! Our tax attorneys are qualified in US Tax Court, allowing us to contest your audit decision at the highest levels.