Cryptocurrency Audit Help | The Original Crypto Tax Lawyer (2024)

Are you facing a cryptocurrency audit? Turn to the original crypto tax lawyers to guide you through!

The experienced tax attorneys at Gordon Law Group have been working in crypto tax law since 2014, and we've helped countless clients through the audit process.

Get the most experienced cryptocurrency audit lawyers on your side. Call today for a confidential consultation!

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3 Easy Steps to Conquer Your Cryptocurrency Audit

  1. Schedule a confidential consultation with our extremely knowledgeable cryptocurrency tax attorneys
  2. Provide your records so we can create your custom audit plan
  3. We represent you to the audit examiner and negotiate on your behalf; you don’t have to speak to the IRS at all!

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Submit your information to schedule a confidential consultation, or call us at (847) 580-1279

Undergoing a Crypto Audit? Time to Call in the Pros

Did you receive notice of a cryptocurrency audit? Worried you could get in trouble because you haven’t fully reported your crypto in past years? We’re here to help.

A crypto tax audit is similar to any other type of IRS audit—except your local IRS examiner may not know the first thing about cryptocurrency.

Virtual currency is taxed differently than fiat and requires painstaking calculations to report correctly. The IRS views crypto as property, not currency, which means that mining, selling, exchanging, or spending your coins are all taxable events that you need to report. Read up on how cryptocurrency and Bitcoin taxes work if you need a refresher.

Here are the most important things to know if you’re undergoing a cryptocurrency audit.

How a cryptocurrency audit works

Whether you’re being audited because of your crypto, or your investments are simply complicating the process, the goal is to prove that you filed your tax returns correctly and paid the correct amount.

Here’s how the cryptocurrency audit process works:

  • The IRS will request records to support the information on your tax returns. This can include paychecks, bank statements, and receipts for any expenses you claimed.
  • In the case of a cryptocurrency audit, you will also need a detailed report of your trading history for the years in question.
  • The audit examiner’s primary goal is to determine whether you reported correctly and paid the right amount in taxes.
  • At the end of your audit, they will assess the amount owed. Collections won’t begin right away, and you do have the option to appeal.
  • If, during your crypto audit, the IRS finds reason to believe you intentionally tried to hide funds or otherwise commit a tax crime, they may refer the case to the Criminal Investigations Division or the Department of Justice for criminal prosecution.

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Why was I selected for a crypto tax audit?

Like many audits, cryptocurrency audits typically occur because the IRS has reason to believe you didn’t report all your taxable income, and therefore didn’t pay enough taxes. Some audits are also conducted randomly.

In any case, you’ll have to either prove that the tax returns in question were correct, or you’ll have to correct them and pay the IRS the taxes due. The burden is on you, as the taxpayer, to prove your tax return is correct.

The IRS has crypto records from US exchanges

Nearly all cryptocurrency exchanges based in the US now send the IRS a 1099-K each year reporting sales data for users who meet a certain trade threshold. And in 2017, Coinbase was forced to send the IRS historical data(covering 2013 to 2015) on over 14,000 users.Some foreign exchanges now send information to the IRS, as well.

If the IRS has your records from an exchange and you haven’t reported crypto on your tax returns—or if what you reported doesn’t match the IRS’s records—this could trigger a cryptocurrency audit or worse.

On the other hand, the IRS may audit you for an unrelated reason, such as unusually high deductions, but your cryptocurrency trades can throw a wrench in the process.

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.

If you’ve had crypto for several years and haven’t always reported it properly, there’s a good chance of this happening to you.

For example, let’s say you’re going through a crypto audit covering the years of 2017, 2018, and 2019. When the IRS examiner looks at your records for 2017, they notice that some coins were sold. They ask when you first acquired those coins, and you tell them you bought the coins in 2014.

If you didn’t report any cryptocurrency before 2017, the IRS examiner may now have reason to believe that you’ve significantly underreported your taxable income. The years of 2014, 2015, and 2016 may then be opened up to an audit, as well.

If the IRS believes you’ve committed tax fraud, there is no statute of limitations for the audit. They can go back as far as they want in that case.

Why you need an experienced professional for your cryptocurrency audit

As we mentioned above, most IRS examiners don’t even know what Bitcoin is—let alone how it should be reported. You need a tax lawyer on your side who:

  • Knows how to navigate the audit process
  • Can build an accurate crypto tax report (even when you may have lost keys or if you used a now-defunct exchange)
  • Knows crypto tax law inside and out to defend your reporting methods

A crypto tax report is a detailed accounting of every single trade—including timestamps of when you bought and sold, the initial amount you spent on the coin, and how much you sold it for. This information is used to calculate your capital gain or loss for each transaction.

There are other factors to consider, too: Long-term gains and short-term gains are taxed at different rates. Some crypto is counted as income and must be reported separately.

Building a proper crypto tax report can be a painstaking, time consuming process. Do not assume the IRS will put in the work to calculate the correct amount owed for you!

We’ve helped hundreds of clients create crypto tax reports for past years, even if they don’t have complete records or have lost access to old wallets. We know the law inside and out, so we can create crypto tax reports that hold up to the most stringent IRS examination.

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After the audit: Paying your crypto tax bill

Many of our crypto clients haven’t reported because they’re afraid they won’t be able to pay the taxes they owe on crypto gains.

What most people don’t realize is that the audit process is only concerned with calculating the amount you owe. You do not have to pay your full tax bill immediately after the cryptocurrency audit is complete.

You cancreate a payment plan with the IRS. There’s virtually always a payment plan or resolution option that works for our clientsandsatisfies the IRS.

You can even appeal your crypto audit results! Our tax attorneys are licensed in US Tax Court, so we can appeal your audit decision to the highest levels.

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Cryptocurrency Audit Help | The Original Crypto Tax Lawyer (2024)

FAQs

How likely is it that the IRS will audit me for crypto? ›

Yes. If the IRS has reason to believe that you are underreporting your crypto taxes, it is likely that they will initiate an audit. Has anyone been audited for crypto? While cryptocurrency tax audits are relatively rare, it's likely that audits will become more common in the upcoming years due to increased IRS funding.

What triggers a crypto tax 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 does the IRS know if you have cryptocurrency? ›

Yes, the IRS can track crypto as the agency has ordered crypto exchanges and trading platforms to report tax forms such as 1099-B and 1099-K to them. Also, in recent years, several exchanges have received several subpoenas directing them to reveal some of the user accounts.

What is the tax question for crypto? ›

In fact, one of the first questions on Form 1040, which is used by most people to file their tax returns, asks the following: “At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest ...

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.

How far back can the IRS audit you? ›

How far back can the IRS go to audit my return? Generally, the IRS can include returns filed within the last three years in an audit. If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years.

How do I not get audited for crypto? ›

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 does a crypto audit look like? ›

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.

How can I avoid IRS with crypto? ›

9 Ways to Legally Avoid Paying Crypto Taxes
  1. Buy Items on BitDials.
  2. Invest Using an IRA.
  3. Have a Long-Term Investment Horizon.
  4. Gift Crypto to Family Members.
  5. Relocate to a Different Country.
  6. Donate Crypto to Charity.
  7. Offset Gains with Appropriate Losses.
  8. Sell Crypto During Low-Income Periods.
Mar 22, 2024

What happens if I don't report crypto on taxes? ›

US taxpayers must report any profits or losses from trading cryptocurrency and any income earned from activities like mining or staking on tax return forms, such as Form 1040 or 8949. Not reporting can result in fines and penalties as high as $100,000 or more severe consequences, including up to five years in prison.

Can the IRS see my Coinbase wallet? ›

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.

What crypto wallet does not report to the IRS? ›

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.

How to cash out crypto without paying taxes? ›

There is no way to legally avoid taxes when cashing out cryptocurrency. However, strategies like tax-loss harvesting can help you reduce your tax bill legally.

What is the new IRS question that must be answered? ›

Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120 and 1120S must check one box answering either "Yes" or "No" to the digital asset question. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023.

How much crypto do I need to claim on taxes? ›

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.

How likely am I to get audited by the IRS? ›

But what are the actual odds of getting audited? Shockingly low for most people. The number of IRS audits has been declining for years. Today, an American's overall chances of being audited are about 1 in 200.

How much crypto needs to be reported to IRS? ›

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.

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