As you’ve likely seen if you’ve read our other articles, dealing with cryptocurrency taxes can be a nightmare. Almost every transaction is reportable in some form or fashion, your cost basis is affected whenever you have a taxable transaction, and the rules are changing so quickly that the understanding you have now will likely be outdated in six months.
Does the IRS Care About My Crypto?
So we’ll often get some variation of these questions:
- “Do I really need to bother with this?”
- “Does the IRS even care?”
- “How could they even find out if I don’t report it?”
The answers are:
- “Yes”
- “Yes”
- “Very easily”
People mistake “I haven’t been caught yet” with “I can’t get caught”.
Remember, blockchain has been relatively fringe up until recent years. Because of that, it represented a fairly small percentage of investment activity and the IRS and SEC paid little attention to it.
This is of course no longer the case. In 2015 the market cap of the entire cryptocurrency market hovered around $5 billion. As of the date of this article, it sits at just below $3 trillion.
If you think the US government doesn’t care about that amount of potential income, you’re fooling yourself.
The SEC and IRS have both strongly signaled the desire for increased reporting requirements for everyone involved in cryptocurrency transactions. KYC (Know Your Customer) is becoming required for almost every platform operating in the US. If you’re trading on a real exchange, your transactions either are already being reported to the IRS or they will be in the near future.
Now, in this point in the discussion, the question often becomes “well, what if I’m not trading on an exchange? They aren’t getting a report for what I’m doing on my MetaMask. They can’t see that, right?”
And while that is perhaps technically true, it ignores a pretty basic question:
“How did you fund your MetaMask to begin with?”
It All Starts Somewhere With KYC
At some point, you had to purchase your first batch of crypto with a fiat currency. And to do that, you more than likely had to use an exchange that had KYC.
All the IRS would have to do is look at your wallet from the KYC platform. They’ll see that you’re buying crypto on Voyager or Coinbase and are then sending the tokens to another wallet.
They’re not stupid. They’re going to investigate that other wallet and will quickly realize it belongs to you as well.
Blockchain is auditable by design. The transactions of each wallet are clearly and easily accessible. Even if you’re doing most of your trading “off-exchange”, all the IRS has to do is follow the paper trail from your original purchase.
Now, we’re not going to claim that there is no possible way to circumvent this. There’s probably some way to layer Monero or some other privacy coin with a dozen wallets and Tor to try to obfuscate things. Some method likely exists that would hide it from the IRS – at least temporarily.
But we’re not going to investigate that nor are any of those methods something we would ever recommend. Crypto income is taxable. Period. We may not like it, but that’s the reality. Going through that amount of effort to hide your crypto transactions from the IRS would almost certainly prove fraudulent intent. And that’s when we escalate from basic penalties and interest to criminal charges. It is absolutely not worth it to try to hide this income.
But that’s not to say you’re completely stuck. There are a ton of legitimate maneuvers you can make to reduce your tax bill. But to do that, you need to make sure you are accurately tracking and understanding your crypto activity – and that you are planning with your CPA throughout the year.
Any accounting, business, or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
