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In recent years, the IRS has made one thing abundantly clear – if you make money from crypto, they want their cut. So if you’re underreporting or outright avoiding crypto taxes, be warned: the penalties are steep. Koinly is a team of crypto tax specialists who can help you avoid making the wrong choice.
Are cryptocurrency taxes possible?
The million dollar question – and the answer is a definite yes. Cryptocurrency taxes are required by almost every country.
The exact tax you’ll pay will vary – but in general you’ll pay either Capital Gains Tax or Income Tax, or both in some cases. You can learn more about how crypto is taxed in your country in Koinly’s crypto tax guides.
What information will tax agencies have about cryptos I own?
Now that Crypto has gone mainstream, tax offices are sending a clear message to investors – you can run, but you can’t hide.
As a digital asset, you might think there’s no way your tax office can know about your crypto, but it’s not the case at all. Crypto exchanges are required to disclose Know Your Customer data, including that of the IRS (US), the ATO (Australia), HMRC in UK and Canada. It is necessary to enforce tax compliance as well as catch crypto-tax avoiders.
Particularly, the IRS has been using John Doe summons in order to legally compel cryptocurrency exchanges to turn over their user data. They’ve already won a John Doe summons against Coinbase, Kraken and Poloniex.
So what happens if you’re caught evading crypto taxes?
The US is a hotbed for crypto tax evasion
The IRS identified two kinds of crypto tax evasion.
- Evasion
- Evasion of payments
There are different penalties for crypto tax evasion.
Evasion
Evasion of assessments is one of the most prevalent forms of tax evasion. This crime is committed by taxpayers who deliberately omit, underreport, or overstate their income. The following are examples of crypto tax fraud:
- Do not report capital gains on sales and other dispositions.
- Report capital gains on sales and other dispositions
- Additional income not reported for cryptocurrency.
- It is not possible to report cryptocurrency-related business income.
- Earning cryptocurrency wages without reporting.
Evasion of payments
After a tax assessment is made, a taxpayer can hide assets and funds that could be used to pay their tax liabilities. This is called evading tax payment. Tax evasion of this nature is less prevalent in the crypto space – but not entirely unknown.
IRS crypto tax evasion penalties
Both tax evasion or fraud are federal crimes in the United States. The severity of your evasion can lead to fines as high as $100,000 (for corporations, up to $500,000) and up to five years in jail. Therefore, if you’re thinking of risking it, don’t.
What if I’ve previously avoided crypto taxes?
The IRS recently updated Form 14457 – Voluntary Disclosure Practice Preclearance request and application – to include a section on reporting virtual currencies. The IRS can request information that taxpayers may have previously not disclosed to it.
Provided the IRS hasn’t initiated proceedings already, a voluntary disclosure can help you avoid criminal prosecution if you’ve previously evaded assessment or payment.
In order to avoid being charged with criminal offenses, make a voluntary disclosure. It is better to disclose than face a $100,000 penalty or a prison sentence.
Crypto tax evasion worldwide
The IRS isn’t the only tax office cracking down on crypto tax evasion – tax agencies all around the world are doing the same.
The penalty for tax evasion in the UK can range from 200% to 7 years imprisonment, depending on the severity of the case. HMRC just took NFTs from a tax fraud case for the first-time.
Tax evasion is a crime in Australia that can lead to up to 2 years imprisonment or 200 penalty units, which amounts roughly $33,000.
Canada has a strict tax law that punishes tax evasion. This includes a fine of up to 20% of the taxes avoided and a 5-year sentence in jail.
Koinly: How Koinly could help you with crypto taxes
Many investors find crypto taxes difficult due to the inability to get guidance from the tax office and the volume of transactions that they must calculate taxes. Koinly is able to help.
Koinly will calculate your cryptocurrency taxes. Simply sync all your crypto transactions to Koinly. Koinly will then identify your cost basis, identify your taxable transactions and calculate your subsequent capital gains, losses and income – all in one easy to read tax summary (and totally free of charge).
You can then download your Koinly tax reports to send to your tax department. Koinly provides a wide range of reports to crypto investors all over the globe. These include TurboTax reports and the IRS Forms 8949 and Schedule A.
Avoid fines and audits. Koinly will do all the legwork. Get started today, and you’ll be amazed at how much you owe.
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