Cryptocurrency has revolutionized the financial world, offering new opportunities for investment, innovation, and wealth creation. However, with great power comes great responsibility—especially when it comes to taxes. The IRS is now intensifying its efforts to ensure cryptocurrency investors and Web3 businesses comply with tax regulations. If you’ve been neglecting your crypto taxes, now is the time to take action. In this blog post, we’ll break down everything you need to know about the IRS crackdown, the risks of non-compliance, and the steps you can take to get your taxes in order.
The IRS is Watching: Why Crypto Compliance Matters
According to the IRS, a staggering 75% of people and businesses transacting in cryptocurrency are not compliant with tax regulations. This means they’re either underreporting their crypto gains or failing to file their taxes altogether. The IRS has made it clear that cryptocurrency is classified as property, not currency, which means every transaction—whether it’s buying, selling, or trading—has tax implications.
The consequences of non-compliance can be severe. The IRS can impose accuracy-related penalties of up to 20%, fraud penalties of up to 75%, and even pursue criminal charges in extreme cases. In fact, the first pure crypto tax indictment case involving Richard Albert III resulted in a plea deal that included three years in jail and the forfeiture of over $120 million in crypto assets.
The message is clear: the IRS is no longer turning a blind eye to cryptocurrency. With new tax forms like the 1099-DA being introduced in 2024, the IRS will have even more tools to track and enforce compliance.
The Risks of Falling Behind on Crypto Taxes
If you haven’t filed your crypto taxes for several years, you’re not alone. Many investors and businesses struggle with the complexities of crypto accounting, especially when dealing with multiple exchanges, wallets, and years of transactions. However, ignoring the problem won’t make it go away. Here’s what could happen if you continue to delay:
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Cumulative Cost Basis Challenges: Cryptocurrency transactions are cumulative, meaning your cost basis (the original value of your crypto) carries over from year to year. If you haven’t been tracking your transactions accurately, calculating your cost basis for the current year becomes a monumental task.
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Data Gaps and Missing Records: Many crypto investors face issues with missing data, especially if they’ve used defunct exchanges or lost access to old wallets. These gaps can lead to inaccurate reporting and unfavorable outcomes during an audit.
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Increased Scrutiny from the IRS: With the introduction of the 1099-DA, exchanges will be required to report transaction data to the IRS in a standardized format. This means the IRS will have more visibility into your crypto activity than ever before.
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Interest and Penalties: The longer you wait to file, the more you’ll owe in interest and penalties. These can quickly add up, turning a manageable tax bill into a financial nightmare.
Steps to Get Your Crypto Taxes in Order
If you’re behind on your crypto taxes, don’t panic. While the process can be complex, taking proactive steps now can save you from even bigger headaches down the road. Here’s what you need to do:
1. Compile All Your Transactions
The first step is to gather all your transaction data from every exchange, wallet, and platform you’ve used. This includes:
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Centralized exchanges (e.g., Coinbase, Binance)
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Decentralized exchanges (e.g., Uniswap, Sushiswap)
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Wallets (e.g., MetaMask, Ledger)
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Any other platforms where you’ve transacted in crypto
If you’ve been trading for several years, this can be a time-consuming process. However, it’s essential to ensure you have a complete and accurate record of your transactions.
2. Calculate Your Cost Basis
Your cost basis is the original value of your crypto when you acquired it. This is used to determine your capital gains or losses when you sell or trade your crypto. Because crypto transactions are cumulative, you’ll need to calculate your cost basis for each year, starting from the year you first began trading.
For example, if you purchased Ethereum in 2020, 2021, and 2022, you’ll need to track the cost basis for each purchase separately. This ensures that when you sell or trade your Ethereum in 2024, you’re accurately reporting your gains or losses.
3. Reconcile Your On-Chain Holdings
One of the most common mistakes in crypto accounting is failing to reconcile your calculated holdings with your on-chain holdings. If there’s a discrepancy between the two, it could indicate missing transactions or errors in your records.
4. Amend Past Tax Returns
If you’ve filed inaccurate tax returns in the past, you’ll need to amend them. This involves recalculating your gains and losses for each year and submitting the corrected returns to the IRS.
5. File Delinquent Returns
If you haven’t filed your taxes for several years, you’ll need to file delinquent returns for each of those years. This can be a daunting task, but it’s crucial to get back into compliance.
6. Pay Your Tax Liabilities
Once you’ve calculated your tax liabilities, you’ll need to pay any outstanding taxes, along with any interest and penalties that may apply.
The Benefits of Proactive Tax Planning
While the process of getting your crypto taxes in order can be challenging, there are significant benefits to being proactive:
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Peace of Mind: Knowing that your taxes are filed accurately and on time can give you peace of mind and protect you from IRS scrutiny.
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Tax Optimization Opportunities: Once you have a clear picture of your cost basis and capital gains, you can explore tax-saving strategies like loss harvesting or advanced tax planning.
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Avoiding Penalties: By staying compliant, you can avoid costly penalties and interest charges.
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Staying Ahead of Enforcement: With the IRS ramping up enforcement, getting ahead of the curve can help you avoid becoming a target.
How Camuso CPA Can Help
At Camuso CPA, we specialize in helping cryptocurrency investors and Web3 businesses navigate the complexities of crypto taxes. Whether you’re years behind on filing or need help with proactive tax planning, our team has the expertise to guide you every step of the way.
Here’s how we can assist you:
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Crypto Accounting: We’ll help you compile your transactions, calculate your cost basis, and reconcile your on-chain holdings.
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Tax Filing: We’ll prepare and file your tax returns, ensuring they’re accurate and compliant with IRS regulations.
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IRS Resolution: If you’re facing an audit or have unresolved tax issues, we’ll work with the IRS on your behalf to resolve them.
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Proactive Tax Planning: We’ll help you optimize your tax strategy to minimize your liabilities and maximize your savings.
Don’t Wait—Take Action Today
The IRS is cracking down on cryptocurrency taxes, and the risks of non-compliance are too great to ignore. Whether you’re an individual investor or a Web3 business, now is the time to get your taxes in order.
If you need help, don’t hesitate to reach out at Camuso CPA.
We’ve helped hundreds of clients navigate the complexities of crypto taxes, and we’re here to help you too. Visit camusocpa.com to schedule a consultation and take the first step toward compliance.
Remember, when it comes to crypto taxes, the best strategy is to stay informed, stay proactive, and stay compliant. Let’s tackle this together and ensure you’re protected from IRS scrutiny.
Disclaimer: This blog post is for informational purposes only and does not constitute legal or tax advice. For personalized guidance, consult a qualified tax professional.