The Internal Revenue Service (IRS) has ramped up its efforts to track down taxpayers who have failed to report cryptocurrency. The most recent effort involved mass mailings to taxpayers who own the asset, whether they were required to report it on their tax filings. More on that effort is discussed in a previous post, available here.
So how are taxpayers supposed to know when they should report their cryptocurrency holdings? A good rule of thumb is that if you are trading or earning money through the use of these digital assets, you probably need to report to the IRS.
Those who realize they did not report this information on previous tax filings may want to consider amending their tax returns. However, it is wise to carefully consider the potential risk with this option as it could result in additional federal investigations and potentially lead to allegations of criminal tax evasion.
Another option: voluntary disclosure. The IRS has allowed reduced penalties in exchange for taxpayers who voluntarily come forward to report an error in their previous tax reporting. Although the penalties are not as high as if the agency discovered the error on its own, there are still some penalties. These normally take the form of a financial fee and interest in addition to a bill to pay up for the missed tax bill.
Determining the best course of action for cryptocurrency compliance will depend on the details of each individual taxpayer’s situation. As a result, it is wise to seek legal counsel experienced in federal tax matters before moving forward, or choosing to ignore, your tax compliance obligations.