What to Do When You Forget to Report Cryptocurrency on Your Tax Return - 2024

Oh no! Tax season is here and you just realized you forgot to report your cryptocurrency transactions last year. Don’t panic. This happens to lots of people. Cryptocurrency is still new and reporting the taxes can be confusing. The good news is there are steps you can take to get back on track.

First, take a deep breath. Everything will be okay. The IRS won’t throw you in jail just because you forgot to report something. They want people to voluntarily comply, not hide from them. As long as you make an effort to fix it, the penalties usually aren’t too bad.

So where do you start? The first thing is to gather all your cryptocurrency records from last year. Log into all your exchanges and wallets and download your full transaction histories. You need a complete record of every trade, sale, spending transaction, staking reward, airdrop, etc. Double check that you have records from all your accounts. It’s easy to forget about an old wallet or exchange you don’t use anymore.

Many exchanges like Coinbase will provide you with tax reports. These include key info like your capital gains and losses. But don’t rely 100% on these. It’s still good to have your full transaction records because sometimes exchanges make mistakes.

Once you have everything, reconstruct your crypto transactions for last year. Calculate your capital gains and losses on each trade. This can be tedious but it’s an essential step. Some tax software like CoinTracker can import your transactions and do this automatically. But double check the reports.

Okay, now you know your full crypto gains and losses for last year. Time to file an amended return. You’ll need to fill out IRS Form 1040X to amend your individual tax return. You’ll have to re-compute your income, deductions, credits, and tax liability.

Here are the key forms and schedules to include for cryptocurrency:

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IRS Form 8949 – This form is for reporting your capital gains and losses from crypto trading. List each trade separately.
Schedule D – This schedule summarizes your gains and losses from Form 8949. It gets transferred to your 1040.
Schedule 1 – Report additional income like crypto staking rewards or mining income here.
Form 1040 – Report your total capital gains and ordinary income from crypto on the appropriate lines.

Page 1 of your 1040X should list the line items that are changing from your original return. Include an explanation that you failed to report your cryptocurrency transactions and are now amending to reflect them.

Attach your updated forms and schedules to your 1040X. Also include your original 1040 from last year, even though you’re amending it. Mail the complete package to the IRS. Keep a copy for your records too.

In addition to amending your federal tax return, check your state tax return too. Most states follow federal treatment of cryptocurrency, but check your state’s laws. You may need to amend your state tax return as well.

What happens after you file your amended return? The IRS will likely review it and send you a bill if you owe additional tax. The good news is you probably won’t get hit with a penalty if you voluntarily amend your return before the IRS catches the mistake.

You may have to pay interest on the extra tax you owe. The IRS interest rate is currently 6% annually. But it’s compounded daily, so it adds up. The sooner you amend, the less interest you’ll owe.

If you already got a refund but now owe tax, the IRS will send a bill. You’ll have to pay back your original refund plus interest. Make sure to pay this promptly to avoid harsh failure-to-pay penalties.

What if you actually overpaid your taxes last year? If your amended return shows you owed less tax than you paid, the IRS will send you a refund check. But don’t expect that to come quickly. Refunds on amended returns often take 3-4 months.

Some people worry that amending will trigger an audit. While it can raise a red flag, the odds are low. Less than 1% of amended returns get audited. Just be thorough and fully document your crypto activity.

Audits aren’t the end of the world. The key is being cooperative and organized. Have your crypto records, tax returns, and documentation ready in case the IRS asks. Be polite and patient with the agent. Answer their questions directly. If errors are found, work with them to fix it.

What if you just don’t amend? Can you pretend it never happened? We don’t recommend this risky approach. The IRS is cracking down on unreported crypto income. They’ve subpoenaed records from major exchanges to look for discrepancies. If they catch you first, the penalties will be much worse.

Some people think if they don’t cash out to fiat, it’s not taxable. That’s not true. Trading one crypto for another is a taxable event. Even exchanging coins for goods or services triggers capital gains. Structuring transactions to avoid reporting is illegal.

We get it, reporting cryptocurrency taxes is confusing and messy. Lots of people make mistakes. The rules can feel overwhelming. But hiding income and hoping you don’t get caught is not a sound strategy. Take control of the situation by amending voluntarily. Yes it’s painful to face your errors, but you’ll sleep better at night.

The longer you wait, the worse it gets. File your amended return as soon as possible. Get help from a tax pro if you need it. Take it one step at a time. Before you know it, this will all be behind you. And now you’ll be prepared to properly report crypto next year. You got this!

What to Do When You Forget to Report Cryptocurrency on Your Tax Return - 2024 - FEDERAL LAWYERS [2024] (2024)

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