Many investors think that they can pull a fast one on the IRS by just not reporting their crypto gains because they believe crypto is "untraceable" by the IRS. That's not the case, unfortunately.
Can the IRS Actually Track my Crypto Transactions?
This is one of the biggest misconceptions out there around cryptocurrencies. Honestly, it's a libertarian dream that the market is completely free and anonymous, and you can transact and no one can tell that you've done something. So then that means you won't have to pay taxes on it.
But this is mostly not true.
There are some types of crypto transactions that are very hard to track. But the IRS does not have to constrain itself to this year's technologies. The IRS can also readily use any and all legal means at its disposal.
If you submit your taxes and don't include taxes due to crypto transactions that you believe are hidden, and the IRS develops technology or gains access to the transactions a year later and discovers that you didn't report on them
Yup, you guessed it.
They are perfectly welcome to charge you for miss filing your taxes. And you will owe lots and lots of penalties, as well as possible legal repercussions for tax avoidance. This can be very possibly because most of us are trading our cryptos in places that are very easy for the IRS to track.
For example, if you made all of your trades on Coinbase and they recently went IPO and are now a publicly traded company, (fully regulated) then they MUST report every one of their transactions to the IRS. They're similar to a traditional brokerage firm in that if you trade a stock, the IRS is aware of it. As a result, you should be reporting your taxes correctly for the crypto transactions you've made.
Bear in mind, that doesn't mean every single one of your transactions is taxed to the fullest extent possible. It just means that we need to do the good due diligence required to figure out which transactions should cause taxes and which shouldn't and file that with the IRS so you don't get in trouble on an audit sometime later.
Moral of the story here is that as tempting as it may be to dream about a taxless utopia...we're not there yet. You have to pay your crypto taxes.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
