What happens if you don’t report cryptocurrency on taxes is more serious than many investors realize. In the United States, the Internal Revenue Service (IRS) has ramped up its efforts to track unreported crypto transactions, issuing subpoenas to exchanges and sending warning notices to taxpayers. Failing to report your crypto activity not only risks audits and penalties but could also result in hefty fines or even legal action.
The IRS treats cryptocurrency as property, which means every trade, sale, or use could trigger a taxable event. Ignoring these obligations can lead to interest charges and fines that eat away at your finances. Worse, repeated violations might even bring criminal tax evasion charges, putting your freedom at stake.
In this article, we will explore the legal consequences of not reporting crypto on your taxes, how the IRS tracks transactions, and ways to stay compliant. So let’s begin!
What Happens If You Don't Report Cryptocurrency On Taxes?
The IRS takes cryptocurrency taxation seriously, and failing to report your crypto activities on your tax return can lead to severe penalties, explained below:
Penalties for Failing to Report Crypto
The punishments for failing to report cryptocurrency can be severe as tax evasion and tax fraud are categorized as federal offenses. If the IRS determines that you’ve committed tax fraud, you could face a penalty of up to 75% of the tax owed.
Additionally, you as an individual may end up paying fines of up to $100,000, while corporations can be fined up to $500,000. In extreme cases, you could serve up to five years in prison.
Recent IRS Crackdown on Crypto Tax Evasion
The IRS is ramping up enforcement against crypto tax evasion. A key example occurred in March 2024, when Frank Richard Ahlgren III of Austin, Texas, was charged for failing to report $4 million in Bitcoin sales and related capital gains from 2017 and 2019. This marked the first case focused solely on unreported cryptocurrency earnings. Ahlgren pled guilty and now faces up to three years in prison, supervised release, restitution, and additional penalties.
Therefore, the consequences of not reporting cryptocurrency on your taxes do outweigh any short-term benefits. The IRS has made it clear that crypto investors must comply with tax regulations, and their recent actions demonstrate their willingness to prosecute those who fail to do so.
About Crypto Tax Evasion In The USA
Crypto tax evasion is a serious concern in the USA, with the IRS categorizing it into two primary types:
- Evasion of assessment.
- Evasion of payment.
Each type carries distinct penalties and risks. Understanding these categories can help you comply with tax laws and avoid severe consequences.
Evasion of Assessment
Evasion of assessment is the more prevalent form of crypto tax evasion. This happens when you deliberately misrepresent or omit information on your tax returns. Here are some examples:
- Not reporting capital gains: Many investors fail to disclose profits from selling or trading cryptocurrencies. This includes gains from exchanging one cryptocurrency for another or converting crypto to fiat.
- Under-reporting capital gains: Some taxpayers report only a portion of their gains, hoping to reduce their taxable income. This is equally illegal and can attract hefty penalties.
- Not reporting additional income in cryptocurrency: Income earned through crypto, such as staking rewards or interest from DeFi platforms, must be reported. Ignoring this income is a common mistake that falls under tax evasion.
- Not reporting business income: Businesses accepting crypto payments must declare these as income. Failure to do so constitutes evasion of assessment.
- Not reporting wages paid in cryptocurrency: Employers who pay wages in crypto must report this to the IRS. Similarly, employees receiving such wages must include them in their taxable income. Avoiding this requirement is a clear form of evasion.
So what happens if you lie on your taxes? The IRS imposes severe penalties, including a 75% fine on the underpaid tax amount. Individuals convicted of this crime face up to five years of imprisonment and fines of up to $100,000. Corporations may incur fines as high as $500,000.
Evasion of Payment
Evasion of payment happens after the IRS has assessed taxes owed. Taxpayers then try to hide assets or funds to avoid paying their liabilities. While less common in the crypto space, it still occurs. For example:
Some individuals move their crypto assets to untraceable wallets or foreign exchanges to shield them from the IRS. This is considered deliberate non-payment.
The penalty for evasion of payment is severe: 15% of the unpaid tax for each month, up to five months, with a maximum penalty of 75% of the total unpaid tax.
Note: Willfully failing to pay taxes, file returns, or maintain adequate records is also a criminal offense. This carries a maximum penalty of one year in prison and fines of up to $25,000 for individuals or $100,000 for corporations.
Can the IRS Track My Crypto Transactions?
Yes, the IRS can track your crypto transactions through data-sharing agreements with crypto exchanges. Many popular exchanges like Coinbase, Kraken, and Poloniex collect Know Your Customer (KYC) information when you create an account. This data is often shared with the IRS to ensure compliance with tax laws.
Additionally, the IRS has used legal tools like John Doe summons to compel exchanges to hand over user information. These actions allow the IRS to identify individuals who might be underreporting or evading taxes on their crypto activities.
IRS 1099 Forms and Reporting
Whenever you receive a 1099 form from a crypto exchange, the IRS gets a copy too. Exchanges such as Coinbase, Crypto.com, and Kraken issue these forms to certain U.S. users when they meet specific transaction thresholds. This process creates a direct line of information between exchanges and the IRS, making it challenging to hide any taxable crypto gains or income.
Blockchain Transparency and Wallet Tracking
The blockchain’s public nature makes it another powerful tool for the IRS. Every transaction on a blockchain is recorded on a public ledger, making it traceable. IRS agents are now trained to link wallet addresses to individuals, uncovering “anonymous” transactions. With the addition of 87,000 agents focusing on crypto tax enforcement, the IRS has significantly increased its ability to match blockchain activity with individual taxpayers.
Active Crypto Tax Investigations
The IRS is actively pursuing cases of crypto tax evasion. In late 2022, the IRS Criminal Investigation Division announced they were building hundreds of cases targeting individuals and businesses evading crypto taxes. These cases are part of a broader effort to ensure compliance with tax regulations in the rapidly growing cryptocurrency market.
Can You Avoid Crypto Taxes In The USA?
When crypto markets surge, the gains can be tempting to keep off the tax radar. But in the USA, the IRS has tools to track crypto transactions. Avoiding crypto taxes isn’t just risky—it’s illegal. Instead, focus on legal ways to reduce your tax liability. Let’s explore how you can manage your crypto taxes while staying compliant.
Tax Loss Harvesting
Tax loss harvesting lets you reduce your overall tax bill by offsetting capital losses against gains. In the U.S., you can deduct up to $3,000 annually in capital losses from your ordinary income. For example, if you sell a crypto asset at a loss, you can use it to offset profits from other trades or your regular income. This strategy is particularly useful during market downturns.
Using Capital Gains Tax Breaks
If your income is below $47,026 as a single filer in 2024, you won’t owe capital gains tax on your crypto profits. This threshold rises to $48,350 in 2025. By managing your taxable income, you could benefit from this tax-free bracket for long-term crypto gains.
Donating Crypto
Donating cryptocurrency to a 501(c)(3) charity can reduce your tax liability. Donations are tax-deductible, allowing you to support causes while minimizing taxes. Ensure the charity has the proper status for the deduction to apply.
Gifting Crypto
You can gift up to $18,000 worth of crypto in 2024 without incurring taxes, thanks to the annual gift tax exemption. This limit increases to $19,000 in 2025. Gifting crypto to friends or family can be a thoughtful and tax-efficient way to share wealth.
Investing in IRAs
Consider holding your crypto in an Individual Retirement Account (IRA). IRAs offer tax advantages, allowing you to defer or avoid taxes on your crypto investments. This is an excellent option for long-term investors who plan to hold onto their assets.
How Can You Submit A Rectified Return?
Now that you know what happens if you don’t report cryptocurrency on taxes let’s understand the process to rectify it. Mistakes on your crypto taxes can happen, but they don’t have to be permanent. If you’ve realized that you made an error or missed reporting your crypto earnings, submitting a rectified return is the way to go. Here’s how you can fix your tax return effectively and stay on the right side of the IRS.
Calculate Your Crypto Tax Liability
Start by figuring out how much you owe in crypto taxes. Using a reliable crypto tax tool like KoinX can make this process easier and more accurate. These tools automatically calculate your tax obligations by analyzing your transactions and applying the correct tax rules. Double-check your calculations to ensure you’re reporting the correct amounts.
Use IRS Form 1040X for Amendments
If you’ve already filed a tax return, you can amend it by using IRS Form 1040X. This form allows you to correct errors on your original submission. Make sure to include all the relevant information, including any overlooked crypto transactions. Once you’ve completed the form, submit it to the IRS. Generally, you’ll hear back from them within 8 to 12 weeks.
Consider Voluntary Disclosure with Form 14457
For serious cases where you’ve intentionally or unintentionally evaded crypto tax payments, the IRS offers another option: Form 14457. This form, updated to include crypto reporting, allows you to voluntarily disclose missed or incorrect tax information. By doing so, you agree to cooperate with the IRS and pay all owed taxes in full. This process can help you avoid criminal charges, provided the IRS hasn’t already initiated proceedings against you.
How Can KoinX Help You With Your Crypto Taxes?
Filing crypto taxes in the USA can be a complex and overwhelming task for many investors. The IRS has specific guidelines for cryptocurrency transactions, and keeping track of trades across multiple wallets, exchanges, and blockchains can become a full-time job. Without the right tools, errors can occur, potentially leading to penalties or missed deductions. That’s where KoinX, a crypto tax software, comes in to make the process smoother and stress-free.
Why Choose KoinX?
Here’s what KoinX offers:
Seamless Integration
KoinX simplifies crypto tax reporting by automatically detecting trades between wallets and fetching transaction details from various exchanges and blockchains. This seamless integration eliminates the need for manual entry, reducing the chances of errors.
Compliant Crypto Tax Report
KoinX ensures your crypto tax report complies with IRS guidelines. The software includes provisions for mining, staking, and airdrops, ensuring your tax filing stays in line with the latest regulations.
Portfolio Insights
With KoinX, you can unify all your trade data across different chains and decentralized finance (DeFi) protocols. This allows you to analyze your portfolio in real time, helping you make informed decisions about your investments.
Safe and Secure
KoinX values your privacy and security. With end-to-end encryption, it ensures that your identity and investment details remain protected throughout the process.
How Can You Use KoinX To Generate Report?
Here’s how you can use KoinX to generate a US tax report:
Sign Up and Sync Your Accounts
Getting started is easy. Sign up for a free account, then sync all your wallets, exchanges, and blockchains with KoinX. You can do this through API integration or by uploading a CSV file with your transaction history.
Let KoinX Do the Calculations
Once your accounts are synced, KoinX will calculate your capital gains, losses, income, and expenses. You can choose your preferred cost basis method to ensure the report aligns with your tax strategy.
Access Your Free Tax Summary
KoinX gives you a free tax summary to view. You only need to pay when you want to download the detailed IRS-compliant tax report that you’ll need for filing.
Download and File Your Tax Report
When you’re ready, simply download the tax report and file it with the IRS. KoinX makes it easy to generate the exact report you need when you need it.
Get started today with KoinX! Sign up for a free account and see how easy it can be to track your crypto transactions and stay compliant with IRS regulations. Take control of your crypto taxes without the hassle.
Conclusion
Failing to report your crypto transactions can lead to more than just financial losses—it can put you in serious legal trouble. What happens if you don’t report cryptocurrency on taxes isn’t just limited to fines and penalties. The IRS has the tools and authority to investigate unreported transactions, which could result in audits, interest charges, or even criminal charges for tax evasion.
Being proactive and compliant with your crypto taxes not only saves you from these risks but also ensures your financial peace of mind. So why wait, sign up on KoinX today and generate accurate, IRS-compliant reports with just a few clicks.
Frequently Asked Questions
Is Crypto-to-Crypto Trade Taxable in the USA?
Yes, crypto-to-crypto trades are taxable in the United States. The IRS treats these transactions as taxable events subject to capital gains tax. When you trade one cryptocurrency for another, you must report the transaction’s fair market value at the time of the trade. To ensure compliance, keep detailed records of all trades and report them accurately when filing your taxes.
How Long Do I Have to Hold Crypto to Avoid Taxes?
You cannot avoid taxes entirely by holding crypto, but holding it for more than a year can significantly reduce your tax rate. If you sell assets held for less than a year, profits are taxed at your regular income tax rate, ranging from 0% to 37%. However, holding for a year or longer qualifies you for long-term capital gains taxes, which are lower and capped at 20%.
What Triggers an IRS Audit for Crypto?
Several factors can trigger an IRS audit for crypto transactions. Common triggers include failing to report all crypto income or trades accurately, engaging in high-value transactions, trading on offshore exchanges, or using private coins. The IRS monitors these activities closely, so it’s essential to maintain accurate records and comply with tax regulations to avoid unnecessary scrutiny.
How Far Back Can the IRS Audit You?
Typically, the IRS can audit returns filed within the past three years. However, if a significant error is discovered, the audit period can be extended up to six years. In rare cases involving fraud or substantial underreporting, there is no statute of limitations. To minimize risks, ensure accurate and complete reporting of all crypto transactions in your tax filings.
