Change is afoot in the crypto world. While virtual currencies have long been regarded as taxable, their use was not heavily monitored by the IRS until recently. Now, however, the IRS is beginning to crack down on tax evaders who rely on virtual currency. As a crypto trader, however, you’re not doomed to audits or worse penalties. Keep these best practices in mind as you avoid trouble with the IRS:
When you purchase a pizza or a cup of coffee with cash, you don’t have to worry about IRS interference. Unfortunately, this is not the case when you use virtual currency. You’ll owe taxes on any exchange of value that occurs — including any purchase of goods or services. Think twice before using digital currency to cover small transactions, because these will need to be tracked carefully, and, eventually, reported to the IRS. Keep a clear record of all crypto transactions, which could prove useful both for reporting and in the event of an audit.
Report Virtual Currency Transaction
While IRS guidance on virtual currency remains decidedly limited, the agency makes one thing crystal clear: virtual currency counts as property — and transactions must be reported accordingly. Taxable events include mining (which is, in most cases, reported as self-employment income), exchanging crypto for cash, or trading different types of virtual currencies. Don’t assume that the IRS will fail to discover these transactions; the agency has already successfully recovered crypto trading information on tens of thousands of individuals and will likely prove successful in upcoming efforts to crack down on tax evaders.
Another key tactic for avoiding a crypto-related audit? Working with an enrolled agent who understands the intricacies of virtual currency transactions. The experts at the Highland Tax Group can help you take the steps necessary to keep the IRS out of your life. Contact us at your earliest convenience to learn more about our proactive approach to handling cryptocurrency tax concerns.