As a cryptocurrency enthusiast, you’re always looking for new ways to optimize your digital investments. If you’re not careful, however, your efforts could lead to major trouble with the IRS. Chief mistakes include failing to disclose the sale or exchange of cryptocurrency on your tax return or other related documents. Unfortunately, even minor reporting mistakes could lead to harsh consequences, as we explain below:
How the IRS Will Handle Virtual Currency For 2020
For years, the IRS neglected to fully address cryptocurrency, leaving many tax filers confused. That all changed with the 2019 tax year, when the agency began to question taxpayers about whether they received, sold, or exchanged virtual currency.
While questions about cryptocurrency were originally included with Schedule 1 — Additional Income and Adjustments to Income — they will move to Form 1040 for 2020. As a result, more taxpayers will need to provide information about their dealings with virtual currency.
What Happens If You Fail to Disclose Virtual Currency Information?
Given the hassle of documenting virtual currency exchanges, it may be tempting to simply check “no” when answering questions about it on your tax return. This seems like a minor transgression, right? In reality, however, this represents a grave risk.
According to Section 7201, it is a crime to willfully attempt to evade taxes. The government holds the burden of demonstrating willful evasion, but it’s perfectly capable of doing so in cases involving cryptocurrency. Taxpayers also risk conviction under Section 7206(1), which criminalizes the act of making false statements on tax returns. Section 7206(1) goes beyond returns to also include statements made on other documents, such as IRS Forms 656 or 433-A.
If you’re worried about dealing with cryptocurrency as you file your next tax return, look to the Highland Tax Group for guidance. We can make the process a little less stressful, or, if needed, advocate on your behalf as you deal with the IRS.