How to Survive a Crypto Tax Audit?

The number of crypto tax audits is increasing every day. The Internal Revenue Service (IRS) has never been in the favor of cryptocurrencies because they believe that it is used for anonymity on the dark web. Therefore, the IRS has prioritized enforcement by auditing crypto investors. Preparing for a crypto tax examination can be vexing. So, to help you prepare better, we have a few tips that will guide you through the whole process. 

Review the Crypto Audit IDR

When you receive an IRS audit notice, you will also receive an IDR, an Information Document Request. When a tax matter is simple, an IDR can be 1-2 pages long, but for more complex situations, it can be almost 30 pages long. So, when you are about to be audited, the first step is to examine your IDR and find out what the IRS is looking for. This will help you prepare how to respond to every question. 

What Cryptocurrencies Did You Have

You have to access all the different cryptocurrencies you have purchased for the audit. For instance, is all your money invested in Bitcoin or do you trade every day with various cryptocurrencies? This will help you respond better to a crypto tax audit notice. 

What Exchanges Hold Your Cryptocurrency?

You have to be clear about your crypto investment. Are they on different exchanges or are they in cold storage wallets? This will help the IRS track your crypto information. In the past few years, the IRS has developed processes that effectively track and unravel the anonymity behind crypto transactions. The bottom line, be clear and transparent about your crypto holdings 

How Many Sales and Exchanges Did You Have?

How many times did you get involved in a crypto transaction? You have to be transparent about this question as well. You have to communicate your goals such as were you going to buy and hold cryptocurrencies for a long time or whether you are an active daily trader. The result of a significant amount of sales and exchange will impact the depth of the crypt tax audit. 

Can you get a 1099 Equivalent or Other Sufficient Records?

There are crypto exchanges that provide 1099 forms or forms equivalent to 1099 to track your transactions year-round. These forms can help you when it comes to reporting transactions and being transparent. The IRS may request these forms and therefore, you must reach these exchanges beforehand what type of information the IRS needs. 

Did You Report the Crypto Income on Your Tax Return?

Cryptocurrency is taxable and there are no two ways about it. The IRS sees cryptocurrency as property and taxes it as such. If you bought and then sold a crypto token, it is a taxable event. And while some taxpayers argue that crypto income is not taxable, you have to report this income on your tax returns. Deliberately trying to avoid crypto taxes is a criminal offense. Especially if you are under audit, do not argue about crypto being not taxable with the IRS. 

Did You Pay Taxes?

If you’ve already paid your taxes, it shows that you were not trying to hide any income. And if you did not report all your income, it doesn’t mean you are going to be penalized. Sometimes, a taxpayer may not owe anything after an audit is over and sometimes a taxpayer might get a refund. Therefore, being under audit is not necessarily a bad thing. If you’ve paid your taxes, you have to keep those records available. 

Final Thoughts

Being under an IRS crypto tax audit can be exhausting. You have to present all the documents and records of the transaction to its officials. For that, you have to dig deep and find out your transaction records. To avoid the digging process, it is highly recommended to keep a clean record of documents. Also, you don’t need a certified tax professional or counsel while you are under audit, but sometimes it can help. 

FAQs

1. How likely is a crypto audit?

These are the most common audit triggers to look out for. If you have a very high income, unreported income, itemized decisions, International assets, suspicious deductions, hobbies as a business, mathematical errors in your report, and large spending or deposits, you might get audited. In most cases, being audited is nothing to be worried about if you have the documents requested by the IRS and are transparent about them. 

2. Will I get audited if I don’t report crypto?

Yes, you will likely get audited if you don’t report your crypto income on your tax returns. The IRS asks you to report different types of crypto transactions and an accurate report of capital gains or losses. 

3. What happens in a crypto audit?

If you are being audited, you have to present a detailed report of your transaction history for the year in question. The primary goal of the audit examiner is to find out whether you reported accurately and paid the right amounts.