Are Crypto Investors at a Higher Risk of Being Audited By the IRS?

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Every taxpayer faces some element of risk when filing returns, but that risk is decidedly elevated for certain types of people. Traditionally, business owners and freelancers have suffered the most audits. More recently, however, this unfortunate group has expanded to include crypto investors, who once successfully flew past the IRS’s radar. Keep reading to get a greater sense of audit risk among crypto miners and traders:

The Source of Audit Risk in Cryptocurrency

Cryptocurrency investments aren’t inherently more risky than any other type of investment, but the potential for audits remains high. This can be attributed, in part, to the considerable confusion regarding how virtual currencies are taxed. Unaware of their tax obligation, many crypto investors neglect to report accurately on what the IRS deems taxable events — anything from mining to selling virtual currency for cash or even exchanging different types of cryptocurrency. With exchanges such as Coinbase increasingly forced to release user information to the IRS, crypto enthusiasts hold far less leeway than they did just a few years ago.

High-Value Transactions

As a crypto investor, your individual risk of auditing may ultimately hinge on your financial success. Larger earnings are more likely to attract interest from the IRS. This was evident in the aforementioned Coinbase debacle, in which the exchange ultimately granted the IRS personal information for all those with transactions exceeding $20,000 in a single year.

Ultimately, the answer to the basic question of audit risk is: it depends. Crypto traders don’t necessarily suffer a higher risk of auditing than traditionally audit-prone taxpayers — but it’s worth remaining wary when all signs point to a future IRS crackdown.

As a crypto investor, you face significant risks regarding taxation and the IRS. These risks can be mitigated, however, with help from the Highland Tax Group. Contact us at your earliest convenience to learn more.