Miles Brooks is a Certified Public Accountant, a Master of Tax graduate, and CoinLedger’s Director of Tax Strategy. Reviewed by:
Jordan Bass is a tax lawyer with a focus on digital assets, a certified public accountant, and the head of tax strategy at CoinLedger.
With the expansion of the cryptocurrency ecosystem, the federal government has increased its resources to combat cryptocurrency tax fraud. Â.
We’ll cover all you need to know about how the IRS monitors cryptocurrency transactions in this guide. We’ll also go over a quick and easy way to include cryptocurrency in your tax return in a matter of minutes. Â.
The increasing popularity of cryptocurrencies has brought with it a heightened focus on taxation. With governments around the world seeking to regulate the digital asset space, many investors are wondering: can the IRS track Bitcoin and other cryptocurrencies?
The answer is yes, the IRS can track Bitcoin and other cryptocurrencies. In this comprehensive guide, we will delve into the various methods employed by the IRS to track crypto transactions, explore the reporting requirements for investors, and provide insights on how to stay compliant with tax regulations.
How the IRS Tracks Crypto Transactions
The IRS utilizes a multi-pronged approach to track crypto transactions:
- Blockchain Analysis: Cryptocurrencies like Bitcoin operate on a public ledger called the blockchain, where all transactions are permanently recorded. The IRS can analyze these transactions to identify patterns and link them to specific individuals.
- KYC Regulations: Centralized cryptocurrency exchanges, such as Coinbase and Kraken, are required to comply with Know Your Customer (KYC) regulations. This means they collect personal information from users, including names, addresses, and social security numbers. The IRS can obtain this information through John Doe summons or other legal means.
- 1099 Forms: Major exchanges are now required to issue 1099 forms to customers who have engaged in significant cryptocurrency transactions. These forms report the total amount of crypto bought and sold, providing the IRS with valuable data on individual activity.
- Data Matching: The IRS can match data from various sources, including banks, payment processors, and cryptocurrency exchanges, to identify individuals who may be underreporting their crypto income.
Reporting Requirements for Crypto Investors
The IRS considers cryptocurrency as property for tax purposes. This means that any gains or losses from buying, selling, or trading cryptocurrencies must be reported on your tax return.
Here’s what you need to report:
- Date of each transaction
- Cost basis (the price you paid for the cryptocurrency)
- Fair market value (the price of the cryptocurrency at the time of the transaction)
- Capital gain or loss
- The parties involved in the transaction
You will need to report this information on Form 8949 and Schedule D, as well as any crypto income on Schedule 1 of your annual tax return.
Staying Compliant with Tax Regulations
To avoid any issues with the IRS, it’s crucial to stay compliant with tax regulations. Here are some tips:
- Keep accurate records of all your crypto transactions.
- Use a reputable cryptocurrency tax software to help you calculate your capital gains and losses.
- Report all your crypto income on your tax return.
- Seek professional advice from a tax advisor if you have any questions or concerns.
Frequently Asked Questions
Can the IRS see my Coinbase transactions?
Yes, Coinbase is required to report certain transactions to the IRS.
Do I have to pay taxes if I don’t cash out my crypto?
Yes, you may still owe taxes on crypto even if you haven’t converted it to fiat currency. This includes events like earning staking rewards or trading one cryptocurrency for another.
What happens if I don’t report my crypto on my taxes?
Failure to report your crypto income can result in penalties and interest charges. In severe cases, it could even lead to criminal prosecution.
The IRS has the ability to track Bitcoin and other cryptocurrencies. Therefore, it’s essential for investors to understand their reporting obligations and take steps to stay compliant. By keeping accurate records, using tax software, and seeking professional advice when needed, you can minimize the risk of any issues with the IRS.
Remember, staying informed and taking proactive steps are key to navigating the ever-evolving world of cryptocurrency taxation.
Can the IRS track NFTs?Â
NFT transactions on blockchains like Ethereum are publicly visible, just like cryptocurrency transactions. The IRS has the ability to identify “anonymous” NFT holders using the same techniques it employs to identify “anonymous” wallet holders.
Can the IRS audit me for cryptocurrency?
If the IRS has grounds to suspect that you are underreporting your cryptocurrency-related taxable income, they may conduct an audit. Â.
Generally, an audit cannot be carried out more than three years following the taxpayer’s filing of their tax return. There is no cap on how far back the IRS can go during a tax audit in cases of fraud.