Crypto Tax Attorneys (2024)

FAQs

Do I have to answer IRS crypto question? ›

Everyone who files Forms 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, 1120 and 1120S must check one box answering either "Yes" or "No" to the digital asset question. The question must be answered by all taxpayers, not just by those who engaged in a transaction involving digital assets in 2023.

Here's how a cryptocurrency tax audit works

Audits can happen through mail or in-person interviews. By law, you must keep tax records for at least three years, but the IRS can look at the past six years. So, it's best to keep records for at least six years.

US taxpayers who fail to report crypto on their taxes can face serious consequences, including fines and penalties as high as $100,000 and up to five years in prison.

If, after the deadline to report and any extensions have passed, you still have not properly reported your crypto gains on Form 8938, you can face additional fines and penalties. After an initial failure to file, the IRS will notify any taxpayer who hasn't completed their annual return or reports.

More recently crypto exchanges must issue 1099-K and 1099-B forms if you have more than $20,000 in proceeds and 200 or more transactions on an exchange the exchange needs to submit that information to the IRS.

Cryptocurrencies are traceable, with transactions recorded on a public ledger accessible to the IRS. The IRS uses advanced methods to track crypto transactions and enforce tax compliance. Centralized exchanges provide user data to the IRS. Use crypto tax tools like Blockpit for accurate reporting and compliance.

If the IRS has reason to believe that you are underreporting your crypto taxes, it is possible that they will initiate an audit or send you a warning letter about your unpaid tax liability.

– However, crypto holders are estimated to have an audit rate of around 2% – 5%, higher than average. – The more activity/transactions with crypto, the higher audit risk seems to be based on professional estimates. – Crypto tax non-compliance is estimated at over 50% by some experts, which drives greater IRS scrutiny.

If you sell your crypto for a loss, the IRS allows you to offset losses against other income on your tax return. These so-called “realized losses” can be used to offset other taxable investment profits. When you hear the term “realized,” it usually means that an asset was sold.

What states are tax free for crypto? ›

States without a personal income tax are generally favorable to individual crypto investors and can be considered crypto friendly states. As of 2023, eight states do not levy a state income tax on individuals. They are: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Reasons for cashing out crypto or Bitcoin

The decision to cash out crypto or Bitcoin depends on your financial goals and market conditions. You may want to lock in gains, cut or harvest losses for taxes, or simply use your digital assets in the real world. It's crucial to consider tax implications and market timing.

You can send any of your crypto between your personal wallets without paying any taxes; Even if you don't sell any of your crypto, you'd still need to answer the crypto question on Form 1040, including reporting your crypto income in your income tax return.

Costs for a professional crypto CPA

The hourly rate for a professional crypto accountant will vary, and how much you can expect to pay will depend on the complexity of your crypto transactions. A CPA will charge between $37 to $400 an hour, and many will not be qualified as crypto tax accountants.

Regardless of the specific form, crypto income is taxable income to the IRS. If you received crypto income, but did not include it on your tax return, you have unreported crypto income. Unreported crypto income is treated the same as other types of unreported income by the IRS.

Yes. If the IRS has reason to believe that you are underreporting your crypto taxes, it is likely that they will initiate an audit. Has anyone been audited for crypto? While cryptocurrency tax audits are relatively rare, it's likely that audits will become more common in the upcoming years due to increased IRS funding.

Mandatory yearly reporting will phase in starting in 2026, with digital currency brokers required to cover gross proceeds from sales in 2025 via Form 1099-DA. In 2027, brokers must include cost basis, or purchase price, for certain digital asset sales for 2026.

It's your responsibility to report your crypto to the IRS

If you use a centralized exchange, like Coinbase, and earn $600 or more in a given year, the exchange will send a 1099 miscellaneous form to both you and the IRS.

Receiving crypto as a gift

You don't have to report that gift in your income tax return or form 8949. If you later sell the crypto you received as a gift, you'd need to know your cost basis in the crypto to calculate your gain or loss on the trade.