Crypto Taxes
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Can the IRS Track Cryptocurrency? - The Risks of Tax Evasion

Can the IRS Track Cryptocurrency? - The Risks of Tax Evasion

Trying to evade cryptocurrency taxes is a bad idea. 

As the cryptocurrency ecosystem has grown in size, the federal government has dedicated more resources to crack down on crypto tax fraud. 

In this guide, we’ll break down everything you need to know about how the IRS tracks cryptocurrency transactions. We’ll also share a simple method that can help you report your cryptocurrency on your tax return in minutes. 

Do major exchanges report to the IRS? 

If you’ve signed up with a cryptocurrency exchange, you’ve likely given personal information such as your name, date of birth, and a copy of your personal ID. Major exchanges that operate within the United States are required by law to collect this information due to Know Your Customer (KYC) regulations.

The IRS can and has requested these records from exchanges. In the past, the IRS has issued John Doe Summons to exchanges like Coinbase and Kraken. 

IRS requesting information from crypto exchanges

In addition, exchanges like Coinbase, Gemini, and Kraken issue 1099 forms to customers and to the IRS reporting on your crypto transaction activity. If you don’t report transactions that have been reported to the IRS via Form 1099, you may automatically be sent a warning letter about your unpaid tax liability. 

In the future, the IRS will have even more information about cryptocurrency investors at its disposal. Due to the 2021 American infrastructure bill, major exchanges operating in the United States will soon be required to report all cryptocurrency disposals to the IRS.

Why does the IRS ask if I sold cryptocurrency?

In recent years, the IRS has increased scrutiny on cryptocurrency transactions. In 2020, a new question was added to Form 1040 that specifically asked taxpayers if they transacted in cryptocurrency during the tax year. 

Remember, answering yes to this question will not increase your crypto tax liability. It’s likely that the IRS is asking this question to gather more information about the digital asset ecosystem.

On the other hand, not answering this question truthfully is a red-flag to the IRS. It’s possible you’re more likely to be audited from doing so.

How can I hide my cryptocurrency from the IRS? 

Crypto tax evasion

Trying to hide your cryptocurrency from the IRS is a bad idea. 

Remember, tax evasion is a serious crime. The maximum penalty for tax evasion is 5 years in prison and up to $100,000 in fines plus the cost of prosecution.

Instead of trying to hide your cryptocurrency, you can look through our list of 10 strategies to legally reduce your crypto tax liability

How does the IRS track cryptocurrency? 

Transactions on blockchains like Bitcoin and Ethereum are publicly visible. Using information obtained from exchanges, the IRS can match ‘anonymous wallets’ to known individuals.

 In the past, the agency has partnered with contractors like Chainalysis for this exact purpose. 

Can the IRS audit me for cryptocurrency?

The IRS can audit you if they have reason to believe that you are underreporting your taxable income from cryptocurrency. 

Typically, the limit for conducting an audit is three years after a taxpayer has filed their tax return. In cases of fraud, there is no limit to how far the IRS can go back in a tax audit.

Can the IRS track NFTs? 

Just like cryptocurrency transactions, NFT transactions on blockchains like Ethereum are publicly visible. The IRS can use the same methods it uses to identify anonymous wallets to identify anonymous NFT holders. 

Which crypto exchanges do not report to the IRS? 

Currently, centralized exchanges like KuCoin and decentralized exchanges like Uniswap do not collect KYC (Know Your Customer) information from users. 

However, it’s important to remember that exchange policies may change in the future as the U.S. government cracks down on crypto tax evasion. In recent years, exchanges like Binance have introduced KYC policies in response to government pressure. 

For more information, check out our list of non-KYC exchanges.

What should I do if I forgot to report my cryptocurrency in previous years? 

If you didn’t report cryptocurrency on your tax return in previous years, it’s recommended that you file an amended tax return. The IRS is more lenient to those who make a good-faith effort to pay their taxes. 

For more information, check out our guide: Forgot to Report Crypto on Your Tax Return?

How do I report cryptocurrency on my taxes? 

Cryptocurrency capital gains should be reported on Form 8949. You are required to include the date you acquired and disposed of your cryptocurrency, as well as your cost basis and proceeds from the disposal.

Cryptocurrency income may be reported on Schedule 1 or Schedule C depending on the specifics of your situation. 

For more information, check out our guide to reporting cryptocurrency on your tax return

Get started with CoinLedger

Looking for an easy way to file your cryptocurrency taxes? CoinLedger can help. 

The platform allows you to automatically connect major exchanges like Coinbase, Kraken, Gemini, as well as wallets like MetaMask. More than 300,000 investors use CoinLedger to generate a comprehensive crypto tax report in minutes.

Get started with a free preview report — there’s no need to enter your credit card details until you’re 100% sure your information is accurate! 

Frequently asked questions 

Let’s sum things up by answering a few commonly asked questions about the IRS’s enforcement of cryptocurrency tax law. 

Can the IRS see Coinbase transactions? 

Currently, exchanges like Coinbase issue 1099 forms to the IRS. In addition, the IRS has issued John Doe Summons to Coinbase and other exchanges to receive access to customer information.

Do you have to pay taxes if you don’t cash out? 

There are certain situations where you’ll incur a tax liability even if you do not convert your cryptocurrency to fiat. Examples include earning staking/mining rewards or trading one cryptocurrency for another. 

Can you track someone using their Bitcoin wallet? 

In the past, the IRS partnered with contractors like Chainalysis to analyze blockchain transactions and identify ‘anonymous wallets’. 

What happens if you don’t report cryptocurrency on your taxes? 

Tax evasion is considered a felony. The maximum penalty is 5 years in prison and a $100,000 fine.

Will the IRS audit my crypto? 

You may be selected for a cryptocurrency tax audit if you’re randomly selected through the IRS’s statistical formula or the IRS has reason to believe that you are underreporting your income.

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