What Happens if I Don’t File My Crypto Taxes?

crypto taxes

What happens if you need to remember to report a small amount of money from cryptocurrencies on your taxes? Could this small mistake cause big problems like fines or even legal issues? In cryptocurrency, knowing and following the tax rules is very important.

In this article, we will explain everything about cryptocurrency taxes. We’ll show you what could go wrong if you don’t report your earnings, even those under $600, and how to avoid problems with the tax authorities. With expert advice, you will learn how to handle your cryptocurrency taxes correctly.

Are you ready to learn and protect yourself from trouble? Let’s begin.

What Happens if I Don't File My Crypto Taxes?

Key Takeaways

  1. Cryptocurrency tax evasion is illegal and can lead to penalties, audits, and even jail time. This includes not reporting income from crypto gains or hiding transactions.
  2. There are two main types of crypto tax evasion: evasion of assessment (failing to report income) and evasion of payment (deliberately not paying taxes owed).
  3. To avoid crypto tax issues, keep accurate records, hold crypto long-term (where applicable), and report all transactions accurately.
  4. You must file crypto taxes, as not reporting crypto taxes can lead to penalties, interest, audits, and criminal charges.
  5. Double taxation of crypto can be avoided by understanding your country's tax laws, reporting only taxable transactions, and keeping detailed records.

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What is Cryptocurrency Tax Evasion

Cryptocurrency tax evasion is when people don't pay the taxes they owe on money made from cryptocurrencies like Bitcoin. Cryptocurrencies are digital or virtual forms of money that use cryptography for security, making them hard to counterfeit. 

Governments around the world have different rules about how cryptocurrencies should be taxed. For example, some countries treat profits from selling cryptocurrencies as capital gains, similar to those from selling stocks, requiring people to pay taxes.

Governments and tax authorities are becoming more aware of these issues and working on better tracking and taxing cryptocurrency transactions. This includes requiring exchanges to report transactions and finding ways to trace cryptocurrency flows back to real people.

What Happens if I Don't File My Crypto Taxes?

Here's a simple breakdown of how cryptocurrency tax evasion can happen:

Not Reporting Income

Some people need to tell the tax authorities when they make money from buying and selling cryptocurrencies. Since cryptocurrencies can be traded on many platforms and don't always require personal information, it can be tempting for some to hide these transactions.

Hiding Transactions

Cryptocurrencies can be transferred between wallets without going through a regulated financial institution, making it harder for authorities to track who owns what. People might use this to hide their profits from trading cryptocurrencies.

Using Cryptocurrencies for Illegal Activities

Since transactions can be semi-anonymous, cryptocurrencies have been used for illegal activities, including tax evasion. People might use them to move money without it being noticed by the tax authorities.

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Types Of Tax Evasion

One of the consequences of not reporting your cryptocurrency transactions on your taxes is the potential for tax evasion. There are two primary forms of cryptocurrency tax evasion: evasion of assessment and evasion of payment.

Evasion of assessment

Evasion of assessment occurs when a taxpayer intentionally fails to report their cryptocurrency transactions to the tax authorities. By hiding their crypto income, they aim to avoid being assessed for taxes on their gains or profits. It is important to note that underreporting or omitting cryptocurrency transactions from your tax return is considered an evasion of assessment and can have severe legal consequences.

Evasion of payment

Evasion of payment, on the other hand, involves deliberately not paying the taxes owed on your cryptocurrency gains. Some individuals may try to hide their income or assets by using cryptocurrency, making it difficult for tax authorities to trace and collect the taxes owed. This can lead to penalties and legal action if discovered.

To rectify the situation and avoid the severe cryptocurrency repercussions of tax evasion, you must accurately report all your crypto transactions and pay the taxes owed. Doing so can ensure compliance with tax laws and avoid penalties, audits, and other legal troubles.

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Types of Taxable Cryptocurrency Transactions

  1. Mining and Staking: Engaging in mining or staking crypto can be lucrative, but it's important to know that these activities typically generate taxable income. The IRS views mined or staked cryptocurrencies as income on the day they are received, valued at their fair market value.
  2. Airdrops and Hard Forks: Receiving new coins through airdrops or due to a blockchain hard fork also triggers a tax event. These coins must be reported as ordinary income, equivalent to their market value at the time of receipt.

Categories of Transactions

The nature of your transactions dictates how they should be categorized for tax purposes. For instance:

  1. Capital Gains: If you buy and sell a cryptocurrency at a higher price, your profit is a capital gain. Short-term capital gains (on assets held for less than a year) are taxed at higher ordinary income rates, whereas long-term gains benefit from lower tax rates.
  2. Ordinary Income: Conversely, mining, staking, or receiving airdrops is typically treated as ordinary income, impacting your tax bracket and overall tax rate.

Advanced Tax Strategies

  1. Tax-Loss Harvesting: This involves selling crypto at a loss to offset capital gains from other investments, reducing your overall taxable income. However, be wary of the wash sale rule, which can disallow a tax write-off for a security repurchased soon after selling at a loss.

How To Legally Minimize Crypto Taxes Liabilities?

It's important to clarify that avoiding taxes is not legal or advisable. However, if you're looking to minimize your tax liability on cryptocurrency transactions legally, here are some strategies you might consider:

  1. Keep accurate records: Track all your transactions meticulously, including dates, values, and what the transaction was for. This helps calculate the right amount of tax.
  2. Hold for the long term: In some jurisdictions, holding cryptocurrency for a longer term may result in a lower tax rate on gains, similar to long-term capital gains in the stock market.
  3. Use tax-advantaged accounts: Some countries allow cryptocurrencies to be held in retirement accounts with tax benefits.
  4. Claim losses: If you've sold cryptocurrency at a loss, you may be able to deduct those losses against other capital gains or even against regular income up to a certain limit.
  5. Donate to charity: Donating cryptocurrency to a registered charity may allow you to claim a deduction and not pay taxes on the appreciated amount.
  6. Leverage tax harvesting: This involves selling crypto that is in a loss position to offset the gains you've realized.
  7. Relocate to a crypto tax-friendly jurisdiction: Some people move to countries with more favorable cryptocurrency tax laws.
  8. Stay updated on tax laws: Tax laws related to cryptocurrency are evolving. Keep abreast of the changes so you can plan your transactions accordingly.

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What Happens if You Don't Report Cryptocurrency on Taxes?

Failing to report cryptocurrency transactions on your taxes can have serious repercussions. Understanding the potential penalties, audits, and other consequences that can arise from not properly reporting your crypto activities is essential. Here's what you need to know:

  1. Penalties and Interest: If you owe taxes on unreported crypto income, you could be charged penalties and interest on the amount you owe. These can add up and become quite expensive.
  2. Audits: Not reporting cryptocurrency might trigger a tax audit. An audit is when tax officials closely examine your financial records to ensure you've reported everything correctly.
  3. Criminal Charges: In serious cases, if someone doesn't report cryptocurrency on purpose to avoid taxes, they could face criminal charges for tax evasion. This could lead to fines or even jail time.
  4. Future Tax Issues: If it's found that you didn't report your cryptocurrency, it could cause long-term tax issues and potential scrutiny of your future tax returns.

How Do I Avoid Double Taxation of Crypto?

Regarding cryptocurrencies, double taxation can be a concern for many investors. Double taxation occurs when you are taxed on the same income or capital gains by two different tax jurisdictions. In the case of crypto, this can happen at both the federal and state levels. However, there are strategies you can employ to avoid or minimize double taxation.

To avoid double taxation on cryptocurrency, you can follow these guidelines:

  1. Understand your country's tax regulations: Different countries have different cryptocurrency rules. Know whether your country considers it a currency, property, or something else for tax purposes.
  2. Declare the right transactions: Only certain transactions are taxable. Buying crypto with fiat and holding it typically isn't taxable. Selling, spending, or trading crypto usually is. Report only the transactions that need to be reported.
  3. Keep detailed records: Document your transactions to track cost basis, gains, and losses. This helps report accurately and claim the correct taxable amounts.
  4. Only use multiple platforms with proper tracking: Using multiple exchanges or wallets can make it easier to track the cost basis, leading to potential double taxation. Use consistent methods to track all transactions.
  5. Use a tax software or professional: Consider using software designed for cryptocurrency tax reporting, or hire a tax professional familiar with crypto.
  6. Tax treaties: If you are dealing with cryptocurrencies in multiple countries, check for tax treaties that may prevent double taxation.
  7. Foreign Tax Credit: If you’ve paid tax to a foreign government, you might be eligible for a foreign tax credit in your home country.

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Do I Have to File Crypto Taxes?

Here is why you have to file taxes on your cryptocurrency earnings:

  1. Taxable Events: Certain events trigger taxable consequences in the crypto space. These include selling crypto for fiat currency (such as US dollars), exchanging one cryptocurrency for another, and using crypto to purchase goods or services.
  2. Capital Gains: You may realize a gain or loss when you sell or exchange cryptocurrency. Holding the cryptocurrency for over a year is a long-term capital gain or loss. If you held it for a year or less, it's a short-term capital gain or loss.
  3. Reporting Requirements: The IRS expects you to report your crypto transactions on your tax return. You'll need to include details such as the date, type of transaction, fair market value, and any capital gains or losses realized.
  4. Penalties and Audits: Failing to report crypto taxes can have serious consequences. If the IRS finds out you haven't reported your cryptocurrency activities, you may face penalties, fines, or audits.

Further Considerations

  1. Gifts and Donations: Gifting cryptocurrency or donating it to a charity can benefit taxpayers. Donations are deductible, and gifts allow you to pass on assets without triggering a tax event under certain thresholds.
  2. International Transactions: Using foreign exchanges or dealing with international clients complicates your tax situation. Understanding the tax requirements in both your home country and the foreign jurisdiction is crucial.
  3. ICO Participation: If you participate in an Initial Coin Offering, the cost basis of your tokens is generally their purchase price. Any subsequent sale or exchange of these tokens must be reported, with gains or losses calculated against the cost basis.
  4. Crypto Loans and Borrowing: Engaging in crypto lending and borrowing activities involves reporting interest earned or paid. These transactions can have implications for your taxable income and need careful handling.

Record-Keeping and Compliance

Maintaining meticulous records of all cryptocurrency transactions is vital. Keep track of dates, amounts, market values, and transaction receipts. Failing to keep adequate records can lead to complications if audited.

Potential Penalties and Legal Consequences

Not reporting cryptocurrency taxes can result in severe penalties and interest on unpaid taxes. The IRS has emphasized compliance in this area, and in recent years, there has been an increase in enforcement actions.

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Need Help?

UPay facilitates spending cryptocurrency on everyday expenses by converting it into fiat currency and offering virtual card services. This feature simplifies using digital assets for purchases and can provide a clear record of transactions, which is essential for tax reporting. 

The platform provides transaction histories crucial for tax documentation, showing all your crypto expenditures and potential capital gains or losses. With UPay's integration into mainstream payment services like Apple Pay and Google Pay, users have an additional transaction record that may be used when preparing for tax filing.

It’s important to note that UPay is a financial service tool, not a tax advisor or a tax filing service. You're still responsible for accurately reporting your cryptocurrency transactions to tax authorities. Always consult a tax professional to ensure you comply with tax regulations.

Wrapping Up

Regardless of the amount, the obligation to declare cryptocurrency earnings depends on your jurisdiction's tax laws. In the United States, for example, the Internal Revenue Service (IRS) requires reporting all cryptocurrency transactions, regardless of the size of the gain or loss.

However, there might be some thresholds for reporting provided by third-party services. For instance, payment processors or exchanges might only issue certain tax forms if you have transactions over a specific threshold, like $600. But you must report all taxable transactions on your tax return.

Always check with the tax authority or a tax professional in your country to understand the specific rules that apply to you. Tax laws are complex and can change, and it's crucial to stay compliant to avoid any issues.

Always consult a certified tax professional or qualified accountant for specific advice and guidance on your tax situation.

Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence before making any trading or investment decisions.

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