Unreported Crypto Income and Taxes

On: May 3, 2023

Why is unreported Crypto Income important to the IRS?  The reason that unreported crypto income is important to the IRS is because you can be charged with avoiding income taxes and be sent to prison and pay restitution. Taxpayers transacting in virtual currency are required by law to report those transactions on their tax returns. In a court case from August 2021, two defendants were charged for underreporting their income in 2016 and 2017. In this case involving Bitqyck, the two individuals were held jointly and severally liable for a scheme they developed in 2016 to promote a new form of cryptocurrency.  The two marketed their scheme to over 13,000 investors who were advised to buy tokens as a way to avoid selling unregistered securities. Mr. Bise underreported his income to the IRS, resulting in a tax loss of $371,278. For that same period, Mr. Mendez also underreported his income to the IRS, resulting in a tax loss of $311,155. In 2018, Bitqyck failed to file any corporate tax returns at all despite netting more than $3.5 million from investors. The total tax loss joint and severally to the United States government between Mr. Bise and Mr. Mendez is more than $1.6 million dollars. They were sentenced to 50 months in federal prison and to pay restitution of $1.6 million apiece.

Where do I find crypto income on my tax return?  You will need to check your federal income tax returns on IRS Form 1040 and check for a Schedule C, a Schedule D, or a Schedule E and any Bitcoin or Coinbase or other cryptocurrency dealer you may have made transactions with over the last three years. In 2020, the IRS Changed the IRS Form 1040 to add a block where you check “yes” or “no” that you did or did not have any dealings with virtual currency that year.

What happens if I get a Notice from the IRS?  The IRS will send out what is called a CP2000 Notice to the taxpayer, and normally this is mailed out long after the taxpayer has filed his or her tax return.  The notice is mailed to the address on the most recent income tax return, so if you have moved, you would need to update your address, or you may miss the notice in the mail.  This notice indicates what is found on your tax return for a particular year, and matched against what other investments like Bitcoin, Coinbase or other virtual currency operators reported. You are given time to respond whether you agree or disagree with the proposed change to your tax return.

Is Cryptocurrency income considered taxable income?  Yes, Mining income is subject to self-employment which constitutes a trade or business.  This determination has been made by the Internal Revenue Service. To report self-employment income and you are a single member business like a Sole Proprietor, then you file an IRS Form 1040, Schedule C. a Schedule D, or a Schedule E depending on which schedule applies to the taxpayer.  To amend an income tax return, you need information from your original tax return, file a Form 1040X and possibly avoid a Crypto Tax Audit.  You may still be subject to penalties if you never filed a tax return or underreported taxable income for a year you receive one of the three letters mentioned above

What steps has the IRS taken to track virtual currency users?  In 2020, the IRS updated the IRS Tax Form 1040 to add a box for taxpayers to report virtual currency to answer “yes” or “no”.  It may be that you did not need to mark the box if you only purchased virtual currency with real US currency or held virtual currency in a wallet you do not need to check the box on IRS Form 1040.