The surge in cryptocurrency’s popularity created a lot of new investors. From TV ads to stadium naming rights, crypto industry advertising reached new heights in the most recent years, and many investors got into the game without fully understanding what they were doing.
By one estimate, 40% of crypto investors did not realize that they had to pay taxes on their crypto investments. The lack of education and awareness around crypto tax obligations is an underrated problem.
The consequences of failing to file crypto taxes can be expensive and inconvenient, and tax revenue agencies around the world are developing better practices for tracking down crypto investors who don’t fulfill their tax obligations.
What Happens If You Don’t File Crypto Taxes?
The consequences of failing to report income on your taxes can be serious. If the tax agency in your country believes you have unreported income, they may initiate an audit.
In an audit, accountants’ pore over every aspect of your financial life. They’ll look at bank statements, invoices, receipts, pay stubs, investment transactions, and more.
Throughout the process, agents may discuss issues with you and reassess your tax obligations. An audit is a very stressful and invasive process. If your tax filing is reassessed, you can wind up facing a bigger bill for taxes owed.
On top of having to pay taxes you didn’t expect, most tax agencies also have steep penalties for failing to report income and pay the appropriate taxes. It can make the mistake even more expensive.
Finally, if tax agencies believe you deliberately avoided paying taxes on income, they may forward your case to prosecutors who will further investigate. Tax fraud can have consequences, including jail.
How Should You Manage Unfiled Crypto Taxes?
Whether you now realize you have unfiled cryptocurrency taxes or you’re facing an audit or reassessment, the best way to start dealing with the problem is by hiring a crypto tax lawyer. You can find full information about how they can help on CryptoTaxLawyer.com, but these are some of the ways they can help.
Filing Unreported Crypto Taxes
A lawyer can help you avoid penalties for unreported crypto taxes while fixing errors from previous years. One program they can help you with is the Voluntary Disclosure Program, which allows you to go back to previous years’ tax returns and correct them without facing additional penalties. You will have to be prepared to pay the taxes you owe, but no additional penalties will apply.
Dealing with Crypto Tax Prosecution
A cryptocurrency tax lawyer can provide professional advice, legal support, and help with audits if you’re facing crypto tax prosecution.
While you are better off dealing with issues before they lead to prosecution, if you are facing an audit or prosecution, you need professional legal support from a lawyer who understands cryptocurrency and its tax obligations.
When Do You Owe Taxes for Investing in Cryptocurrency?
Knowing the tax obligations of investing in crypto can help you make smarter investments and plan your investment strategy. You may be surprised what kind of transactions are taxable events, and that can change how you use cryptocurrency.
First of all, you will likely owe taxes when you sell cryptocurrency, (and trading one coin for another is considered to be a sale for tax purposes) especially if it is a profitable sale.
This is usually treated as either a capital gain or business income (if you frequently trade crypto), and the profit you earn should be reported when you pay your taxes.
Whether your investments count as capital gains or business income can have a huge impact on your taxes, too, which is one reason why it may be smart to hold onto crypto assets longer and trade less frequently.
There are plenty of other cases where cryptocurrency can be taxed, too. Mining cryptocurrency is often considered to be a business activity, and profits from this are taxed as income.
Most importantly, buying goods or services with cryptocurrency is considered the same as selling cryptocurrency. You will be taxed as though you sold cryptocurrency for Fair Market Value at the time you “spent” your cryptocurrency. This can radically change the way investors use cryptocurrency.
One thing that is not taxable is holding cryptocurrency. Owning crypto assets alone is not a taxable event.
If you’ve invested in cryptocurrency, learn your tax obligations and fix previous years’ tax returns before you face steeper penalties.
