In the current bear market, some investors may be tempted not to report their crypto income from the previous bull market. However, failing to report cryptocurrency on your taxes can have serious consequences, as outlined in our guide to crypto tax evasion.
In the US, crypto is considered a digital asset and is subject to both Income Tax and Capital Gains Tax. Investors are required to report crypto income in their yearly tax returns. Evading crypto taxes is a federal offense that can result in penalties of up to 75% of the tax due and even 5 years in jail.
It’s worth noting that the IRS already has access to information about your crypto holdings, as crypto exchanges are required to share customer data with the IRS. In fact, in November 2022, the IRS confirmed that it’s building hundreds of cases relating to crypto tax evasion.
To remain in compliance with the IRS, crypto investors should consider using crypto tax software like Koinly. This can help ensure that all crypto transactions are accurately tracked and reported on their tax return.
Why Should I Report my Crypto Income?
The temptation to avoid paying crypto taxes on gains from the previous financial year is high, especially in the current bear market, where many investors are experiencing losses. However, it’s not advisable to evade crypto taxes, and here’s why.
The IRS is likely already aware of your crypto income and investments, as they have various ways of accessing this information. Some crypto exchanges share KYC data with the IRS, and the agency has previously used John Doe summons to legally require exchanges to share user data. These summons have been successful against exchanges like Coinbase, Kraken, and Poloniex.
Additionally, whenever you receive an IRS 1099 form related to your crypto investments, the IRS receives the same information. Many exchanges, including Coinbase, Crypto.com, and Kraken, issue 1099 forms to certain US users. Therefore, it’s important to stay compliant with the IRS and use tools like Koinly to accurately report your crypto gains, losses, and income on your tax return. Failure to do so is considered a federal offense and can result in penalties of up to 75% of the tax due (maximum $100,000) and 5 years in jail.