Just like any other exchange of good or services, it’s imperative that you properly report your crypto transactions to the IRS. Failure to do so can lead to costly penalties. Even worse, if the IRS finds out you have intentionally committed tax fraud in your reporting, you could face legal repercussions and even jail time. Don’t get stuck in a battle with the IRS. Here’s all you need to know about paying taxes on capital gains and preventing the IRS from accusing you of tax fraud.
How Does the IRS Know If I Have a Cryptocurrency Account?
What might have flown under the radar in the past will no longer get by when it comes to cryptocurrency accounts and IRS reporting. Thanks to a landmark case in 2015, the IRS was able to subpoena Coinbase to provide detailed information about cryptocurrency accounts and the individuals who owned them. With over 12 million cryptocurrency accounts circulating around the world of cyber exchange, only around 800 individuals had actually shown crypto exchange on their tax returns.
The IRS has a way of finding out whether or not you’ve failed to report your crypto transactions. And, if they do find out you have failed to report, you can face some serious financial repercussions that could cost you thousands of dollars in penalties. When it comes to IRS reporting and cryptocurrency tax events, the burden of reporting lies on you. That’s why it’s imperative you report all selling, trading, and crypto exchange to the IRS.
What Happens If I Haven’t Paid Taxes on Crypto Capital Gains?
One of the most common cryptocurrency tax questions we get is “what is the worst case scenario if I haven’t paid taxes on crypto capital gains?” When we offer cryptocurrency tax tips, we like to point out a very important thing to remember. In America, there are no free lunches. If you are richer today than you were yesterday, there is probably a tax consequence that you own tax money on right now.
When it comes to IRS reporting, there are consequences you will have to face if you don’t pay your taxes in a timely fashion. And, if you have failed to report your gains correctly, there is a strong chance that the IRS will find out. If the IRS discovers that you have not paid your estimated payments based on crypto capital gains when you file your taxes in April, you will pay the price.
Even if you file an extension, the IRS doesn’t give you additional time to pay your taxes. Taxes are actually due at the time a taxable event occurred. The longer you wait to pay, the more expensive the taxes will be. And, as more time goes on, failure to pay penalties can get extremely expensive. If you fail to pay your taxes at the time an exchange occurs, you will be charged a half a percent per month plus a failure to pay penalty. Over time, that will really add up!
In order to avoid these crypto interest charges and failure to pay penalties, it’s crucial that you estimate your taxes due on a quarterly basis and make sure you are paying the estimated amount while in the process of your cryptocurrency transactions. This will take the guesswork out of reporting and eliminate additional costs of failing to report your earnings properly.
Can the IRS Find Out If I’ve Committed Tax Fraud?
When it comes to tax returns and reporting, never underestimate the abilities of the IRS tax authorities. If they suspect there is a discrepancy between your reporting and your capital gains and income, the IRS will find out. Believe it or not, tax authorities can even use third-party sources like your social media accounts to support their fight against tax fraud.
The fact that the tax authorities have a wealth of resources to track your activity should be even more reason to make sure you are diligent about your record keeping and your IRS reporting. If you are posting your new Lamborghini or Rolls-Royce on Facebook or throwing up pictures of piles of cash or expensive vacations on Instagram, be prepared to answer some heavy questions from the IRS.
The IRS has brought taxpayers in front of the legal system with recorded court cases that involve social media accounts. They can demand an explanation of where the funding came from for expensive items or fancy vacations. Were you just renting that expensive ride you posted on Facebook? Did your parents pay for the fancy vacation for your whole family? Or, are these lavish luxuries a result of gains that you failed to report?
One of the best pieces of cryptocurrency tax advice we can give you is to be mindful of what you are posting to social media. The IRS will turn to third-party sources to prove tax fraud if they are tracking you with suspicion. They will use the information they find to substantiate their claims and fight potential fraud. They will talk to your neighbors. They will talk to third parties and do their research to build a case against you.
Does a Tax Authority Have to Notify Me If They Are Using Third-Party Sources, Like Social Media, to Prove Tax Fraud?
Among the cryptocurrency tax questions we hear is “does the IRS have to notify me if they are research third-party sources to build a tax fraud case against me?” The answer is yes. Once the IRS starts looking into third-party sources to build a case against you, they need to notify you that they are going to be talking to third parties. But, that doesn’t mean they don’t already have a solid wealth of information, especially if you’ve been bragging on social media.
Keep this in mind the next time you hop on Facebook or Instagram to show off your latest toy. These posts can be used against you in the future. So you should be careful what you post today if you want to avoid trouble with the IRS tomorrow.
If you’re caught in a bind when it comes to tax fraud or IRS reporting, you’re not alone. At Advanced Accounting, we have the experience and knowledge to help you understand your tax situation and fix any discrepancies before it costs you. We provide our clients with complimentary consultations to answer all their cryptocurrency tax advice questions. We’ll schedule a call to talk about your trading, help you understand the effects of your actions, and find legal solutions to help you avoid penalties and fees and pay less to the IRS.
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