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Reasons To File Your Crypto Taxes

Reasons To File Your Crypto Taxes

Filing your crypto income taxes is not an option; it is a must under the IRS tax code. Here are some reasons why you should start reporting cryptocurrency income on your tax return.


Questions about cryptocurrency on form 1040

Starting this year, the IRS asks all U.S. taxpayers if they received, sold, shipped, traded, or earned financial interest in a virtual currency this year. This question was first introduced in Schedule 1 of 2019. For this same question to have moved from Schedule 1 to the front and center of Form 1040, indicate the seriousness with which the IRS is investigating this space. In the future, it will be extremely difficult to find an excuse not to know the crypto tax declaration requirements.

Remember that you are signing the return under perjury and penalty, so you should answer this question as accurately as possible and complete the appropriate tax forms, such as Form 8949 and Schedule D.


History of Crypto Tax Rules

Some people think the guide on cryptocurrencies is not very obvious. Unfortunately, this is not the case.

In most taxpayers' hands, cryptocurrencies like bitcoin, ethereum, and the likes are capital goods. Capital goods are subject to capital gains tax. Capital gains taxes have been around for decades, long before the invention of bitcoin. Additionally, in 2014, the IRS assumed that cryptocurrencies are treated as property and that all general property tax rules apply to cryptocurrencies (Notice 2014-21). While there are many unique situations where legacy tax laws and existing generic guidelines do not provide immediate authority, there is more than enough tax advice for the average cryptocurrency user to record their taxes properly.


Tax reminder letters

The IRS has been quite aggressive when sending tax alerts to cryptocurrency users who fail to report cryptocurrency holdings. In 2019, the IRS sent tax notices to 10,000 taxpayers. The IRS sent out another set of these letters in August 2020. These letters were available in three variations (Letter 6173, Letter 6174, and Letter 6174-A).

Cryptocurrency users will likely receive these letters reminding them of their cryptocurrency tax obligations every year. Managing these letters, especially the letters 6173, can be expensive and time-consuming. Most of these headaches can be eliminated primarily through proactively filing your crypto taxes.


There are rewards for catching cryptocurrency tax evaders.

As if warning letters weren't enough, the IRS offers rewards to businesses that help them catch tax evaders. For example, the IRS offers a reward of $625,000 to anyone who manages to break into the Monero and Lightning networks. It also offered a $250,000 contract to a crypto tracking software company to assist with ongoing tax audits. The IRS also maintains close and ongoing relationships with crypto compliance companies such as Coinbase Analytics, Chainalysis, and Palantir.


Avoid tax audits

The statute of limitations is a legal concept that restricts the IRS's power to control tax returns. Submission of a tax return begins the statute of limitations for that year. The general limitation period is three years. For example, this means that if you file a correct tax return for the 2020 fiscal year on April 15, 2021, the IRS will have until April 15, 2024 (three years from the filing date) to complete the audit if your statement is selected. After this date, the Internal Revenue Service does not have the authority to audit the 2020 fiscal year.

There are two exceptions to the three-year rule. First, if you underestimate your gross income by more than 25%, the limitation period is increased to six years. Second, if you haven't filed a tax return, the statute of limitations never starts so that the IRS can follow you at any time.

Therefore, when filing an accurate quantified tax return, initiate the three-year limitation period for that fiscal year and severely limit the IRS's power to control you at the end of this period. That's why it is best to file something rather than nothing. Don't skip the filing and give the IRS unlimited time to check your taxes!


Write-Off Losses

The social security number allows you to deduct crypto business losses. If you are an amateur investor, you can deduct capital losses of up to $ 3,000 each year. If there are losses greater than this amount, the remainder will be carried forward to future years. When you realize capital gains in subsequent years, you can use those reported losses to offset those capital gains. Additionally, you can use crypto losses to offset stocks and other capital gains.

If you are regarded as a trader for tax purposes, there is no limit to the deduction of losses in any given year. You can even deduct unrealized losses from crypto gains if you correctly make the tax election.

Obviously, it is impossible to take advantage of these cancellations and the associated benefits without filing the tax return.


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