Cryptocurrency Tax Audits
Cryptocurrency tax audits are on the rise. In general, the Internal Revenue Service and the Justice Department are not big fans of cryptocurrency. That is because in previous years, cryptocurrency was used for anonymity on the dark web and websites such as Silk Road, in order to avoid detection for the acquisition of certain illicit items. Fast forward to the present and cryptocurrency is still all the rage, but the IRS still believes that it is being used disproportionally for bad instead of good — and therefore has made enforcement a key priority. Preparing and undergoing a tax examination for Crypto can be exhausting, but hopefully, these eight steps will help you prepare both mentally and physically for the audit.
Review the Crypto Audit IDR
When a person receives a notice of examination from the IRS, they will also receive an IDR which is an Information Document Request. Some IDRs are relatively short and may only be a page or two — while others can be upwards of 30+ pages on more complex tax matters. Therefore, when you are under a crypto audit, the first step always is to evaluate the IDR to determine what the IRS is asking for so that you can make mental notes as to what you’ll need to respond and prepare an outline of how to respond.
What Types of Crypto Do You Have
You should assess the different cryptocurrencies you have acquired for the audit period. For example, is all of your money in Bitcoin or are you an active trader that has various different types of cryptocurrency and therefore will have to undertake a much more detailed undertaking to ascertain the information necessary to respond to the exam notice?
What Exchanges Hold Your Cryptocurrency?
Do you have all of your cryptocurrency in a cold storage wallet, or do you maintain various hot wallets on different exchanges? This is very important, and it may impact the ability of the Internal Revenue Service to track your information or not. It is important to note that the IRS has been working to develop various processes and procedures to effectively unravel the anonymity you may have believed you had, as a result of prior transactions. This includes arrests and John Doe Summonses.
How Many Sales and Exchanges Did You Have?
Was it your goal to buy and hold cryptocurrency such as Bitcoin and Ethereum for a few years – or were you actively trading and exchanging your cryptocurrency on a daily, weekly, or monthly basis. Whether or not you have significant amounts of sales and exchanges or not will impact the depth of the audit and how much information you may need to obtain.
Can you get a 1099 Equivalent or Other Sufficient Records?
Some cryptocurrency exchanges will provide you with a 1099 or 1099-equivalent so that you can track the transactions throughout the year. This is a lifesaver for taxpayers when it comes time to reporting the transactions on their tax return — and it is something that the IRS may request. Therefore, you may want to consider reaching out to the different exchanges to determine whether or not they can provide you with this type of information.
Did You Report the Crypto Income on Your Tax Return?
In general, cryptocurrency is taxable. It …….
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