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IRS tracks People Not Declaring their cryptos

IRS tracking

January 4, 2021 | 

428 Views | 

JOHN K MWANIKI | 

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The crypto growth in recent years has been a phenomenon. Digital currencies have gained market traction as they become mainstream. Already, some traders are relying on it as the main income stream. Others also hold it as they would any other investment. 

Like any other income, cryptos are bound to taxation. The only concern, though, is that it's still a new asset with no particular provision. Most of the traders don't understand how to pay tax from crypto earnings. Others also take advantage not to declare or under-declare their crypto assets. 

The Internal Revenue Service (IRS) tracks crypto taxation to help solve the taxation issue. It provides for the taxation protocols. So far, it requires the traders to declare the digital assets they own. They also have to state the exchanges and other crypto services they use. The authority then uses this information for taxation purposes. 

One of the ways through which the IRS tracks taxation is by reaching out to crypto currency users. It recently sent out letters to the crypto users reminding them of the tax obligation. These letters showed the much they needed to pay and possible repercussions. 

Failure to declare digital currency earnings to the authority can attract a jail term of up to 5 years or a $250000 fine. 

With such risks, failing to pay taxes is not an option. The lack of information notwithstanding. It's up to the crypto trader to look for crypto taxation measures and know how much to pay. You have to know that selling virtual currency for profit comes with a capital gain tax. The same way getting paid in cryptos attracts a tax of its own. 

The same adage of "ignorance is no defense" remains. 

How does the IRS Get Crypto Taxation Data?

Given a choice, everyone would wish not to pay taxes. They would want to have the whole gains to themselves. So far, some have tried to evade the cryptocurrencies taxes. It only goes well until they receive the form 2099-K or the 2099-B informing them of the failure to comply. This has led most people to wonder how the tax authority gains the information. 

One possible way the tax collector gains information is through the embedded information on the IRS information reporting program. The authority directs the crypto exchanges to file forms for all transactions of over $20000 in value. They give a form for both the trader and the tax authority. 

The taxpayer, in most cases, never knows that the authority is the information. They would go ahead not to declare such transactions. The authority's computer systems flag off such instantly. It then sends the user a CP-2000 form. 

The tax authority has the courts to help in tracking tax payments. It subpoenas the various exchanges for information on the users. For example, in 2013, it subpoenaed Coinbase for information on its users. It requested information on users' identity, transactions, and source of income. 

At one time, it subpoenaed Bitstamp to gain information on a trader who had applied for tax relief of over $15,000. Such legal action helps when the IRS tracks all payments. They only have to run the information from the exchanges to what a user report and get the difference. 

How to Stay Safe from IRS Tracking

Now that you understand the need to pay crypto taxes and possible consequences for failure, it's time to know how to keep safe. Following these tips will keep you safe when IRS tracks crypto taxes;

  • Understand Crypto taxes 

As a decentralized asset, most people's cryptos are free from taxation. They think they can trade and get away with failing to declare the returns. Mostly this happens in peer-to-peer transactions

Most people fail to understand that the cryptos end up in the exchanges at some point. Following the exchange regulations, the authority will notice the unreported cases. 

Taxing is not the easiest subject for most traders. For the sake of safety, there is no option but to learn. Consider starting with the basics before going into the finer details. You will not have to struggle once you start managing your taxes when IRS tracks the reports. 

  • Compare various crypto exchanges

There are several crypto exchanges in the cryptocurrency market. As a growing market, the exchanges are yet to have a harmonized market provision. They thus operate on different levels. 

Look for information from the various major exchanges. Consider some like Coinbase, which have been in operations for some time. 

The exchanges will guide you on how to report the returns. Knowing the different exchanges also help when you receive crypto assets from other parties. It would help if you had different operational rates from these exchanges to determine your liability. 

  • Report everything 

One mistake you are likely to commit when filing the crypto taxes is to believe not everything matters. You might think that some transactions are too small to report. 

Keep track of every crypto item you interact with. Whether you bought a small item using cryptos or received a crypto gift, it must be on the record. 

Leaving out small details is what messes you when IRS tracks those not declaring the taxes. Also, keeping records helps you manage your finances. You get to understand how much you spend on cryptos and budget for them. It is also a way to observe the market. 

  • Hire an expert 

While the crypto market is still new, it is not short of experts. There are several crypto trading and tax experts to consult when not sure about the taxation. 

You might also consider the crypto and taxation attorneys when not sure. The expert guide comes in handy to ensure you have everything in place before the IRS comes calling. 

You also need an expert when you receive the IRS warning letters. They will guide you on how to reply and the information to include. While the services might be a little costly, it is worth staying out of the regulators' way. 

Bottom Line 

Crypto taxation is a new concept for most traders. They are used to the decentralized times when the coins were a reserve for the market trends.

For now, the traders must report all crypto interactions in any form. It is the only way to keep safe when IRS tracks those who fail to pay taxes. You can either learn the crypto by yourself or hire an expert. 

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