What You Need to Know if the IRS Scrutinizes Your Cryptocurrency History
If you invest in cryptocurrency, you could face scrutiny from the IRS in 2021. The IRS has made clear that it is paying attention to cryptocurrency investors, and that it will be vigorously enforcing investors’ reporting and payment obligations in the year to come. With Tax Day just around the corner (extended to May 17, 2021, for individual taxpayers), cryptocurrency investors need to understand their reporting and payment obligations, and they need to prepare themselves for possible IRS scrutiny. In this article, Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, provides an introduction to what cryptocurrency investors need to know about IRS audits.
Cryptocurrency Investors Need Comprehensive Documentation
Not only does the IRS expect cryptocurrency investors to accurately report and pay their federal income tax liability, but it also expects investors to be able to prove that their returns are accurate. As a result, documentation is absolutely imperative. Cryptocurrency investors should collect their transaction histories prior to preparing their annual returns, and they should keep this documentation readily available in case a revenue agent has questions.
When examining cryptocurrency investors’ returns, revenue agents will be looking for a few key details in particular. These details include:
- Appropriate characterization of income as ordinary or capital
- Appropriate characterization of capital gains and losses as long-term or short-term
- Accurate calculation of adjusted basis
- Accurate reflection of the sale price or fair market value (FMV) at the time of disposition
- Accurate calculation of federal income tax liability
In addition to targeting cryptocurrency investors based on apparent errors and omissions in their returns, the IRS will also be targeting investors based on information it obtains from cryptocurrency exchanges. If an exchange provides information about your transaction history and you don’t include information about your cryptocurrency transactions in your returns, this has a very high likelihood of triggering an IRS audit in 2021.
Responding to an IRS Cryptocurrency Tax Audit
If the IRS audits your tax return, what can you expect, and what can – and should – you do in response? One of the first things you need to do is to try to understand the scope of the audit: Is the IRS focused on this year’s return only, or is it scrutinizing multiple years’ filings? Is the revenue agent conducting a correspondence audit, office audit or field audit? The answers to these two questions will tell you a lot about what you can expect as you move forward, and they will help guide the steps you take in response to the audit as well.
While you can try to navigate an IRS audit on your own, doing so can be extremely risky—especially when the audit involves an IRS enforcement priority like cryptocurrency. It is far better to seek legal advice and representation, and consulting with a Washington D.C. tax attorney promptly will give you the best chance of achieving an efficient and favorable result.
Contact Washington D.C. Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group
Do you have questions about cryptocurrency taxes? Are you concerned about the potential consequences of an IRS audit? To discuss your situation with Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033, email firstname.lastname@example.org or request a confidential consultation online today.