At Risk For A Cryptocurrency Audit? - Atlanta Tax Lawyer (2024)

FAQs

At Risk For A Cryptocurrency Audit? - Atlanta Tax Lawyer? ›

The short answer is “no,” buying or selling cryptocurrencies won't necessarily trigger an audit.

What are the odds of a crypto tax audit? In general, the odds of an audit are relatively low. It was estimated that 0.63% of tax returns in 2023 were selected for an audit.

Crypto audit triggers include failure to accurately report transactions and income, large transactions or significant gains, inconsistencies or discrepancies in reporting, use of privacy-focused coins, and participation in offshore exchanges.

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

Key Takeaways. Cryptocurrency transactions are traceable, requiring exchanges to report to the IRS, necessitating diligent reporting by users. The IRS uses advanced methods to monitor crypto transactions, ensuring tax compliance.

Generally, an audit team can complete a detailed report within a few days. However, larger applications may take longer to audit. Allowing time for a full security audit is essential to the success of your blockchain application.

Keep thorough records. Knowing that audit activity is increasing, being proactive about an audit is the best early defense strategy. By keeping accurate transaction records, you minimize your exposure to paying back taxes, penalties, and interest on the taxable value of your crypto holdings.

What if I get audited? The IRS has started auditing taxpayers specifically to evaluate their crypto trades. This is nothing to worry about and you are expected to disclose any addresses or wallets you own or control and any exchange accounts you have.

Although crypto assets have unique intricacies, an audit resembles a cash or foreign exchange audit. Auditors will: Verify that transactions align with crypto holdings. Assess proper risk mitigation, such as the entity's ability to handle the tax obligations of trading digital assets.

What happens if you get audited and don't have receipts? ›

The Internal Revenue Service may allow expense reconstruction, enabling taxpayers to verify taxes with other information. But the commission will not prosecute you for losing receipts. The IRS may disallow deductions for items or services without receipts or only allow a minimum, even after invoking the Cohan rule.

For these audits, the IRS is often freezing refunds. Because the IRS has to pay interest on refunds it pays late, the IRS tries to start and finish these audits quickly. They are usually done by mail. Once you answer the IRS' questions about the accuracy of your return, the IRS will release your refund.

So what are the odds of getting audited? Very low. Only 0.2% of all individual income tax returns filed for the 2020 tax year faced an audit, according to the most recent data available from the IRS.

Under some circ*mstances, Coinbase does report to the IRS, but that doesn't imply the individual taxpayer is not responsible for reporting. Coinbase's reports to the IRS can include forms 1099-MISC for US traders earning over $600 from crypto rewards or staking in a given tax year.

Certain cryptocurrency exchanges and apps do not report user transactions to the IRS. These include decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms that do not have reporting obligations under US tax law.

New Cryptocurrency Reporting Form.

The proposed regulations would mandate brokers, including digital asset trading platforms and payment processors, to report customers' sales and exchanges of digital assets on Form 1099-DA starting from Jan. 1, 2025.

Very low. Only 0.2% of all individual income tax returns filed for the 2020 tax year faced an audit, according to the most recent data available from the IRS. That means about 1 in 500 tax returns are audited each year.

Having digital assets, including cryptocurrency, such as Bitcoin, might increase your chances of an audit. IRS Form 1040 asks whether you received, sold, exchanged, or otherwise disposed of a digital asset during the year. If you say "yes," your answer increases your audit chances.

You owe taxes on any amount of profit or income, even $1. Crypto exchanges are required to report income of more than $600, but you still are required to pay taxes on smaller amounts. Do you need to report taxes on Bitcoin you don't sell? If you buy Bitcoin, there's nothing to report until you sell.