What to Do If You Forgot to Report Your Crypto Trades On Last Year's Tax Return
Between the recent IRS summons against Coinbase and the several SEC enforcement actions the agency has taken against ICO’s, it is clear that the US is ramping up to start coming after those that did not properly report their cryptocurrency-trading on prior years tax returns.
The IRS can go back up to three years to prosecute cases of tax evasion, and in cases where they find substantial error, they can decide to go back up to six years or more. This has a lot of crypto investors and traders nervous about winding up with an audit and tax bill years down the road that they can’t afford. The best solution to this problem is to simply be proactive, and amend your previous years return.
You might be asking yourself, is my crypto activity even taxable? The answer is yes. If you were buying and selling cryptocurrency at any point in the past few years, you need to report these transactions on your annual tax return. To learn exactly how the IRS treats cryptocurrency, it will be helpful to read through our detailed guide: The Trader’s Guide to Cryptocurrency Taxes.
So what should you do if you already filed your tax return, but you forgot–or didn’t know you had to–report your cryptocurrency gains on that return? The best idea is to amend your tax return from whichever year(s) you didn’t include your crypto trades.
You have three years from the date that you filed your return to file an amended return, and the IRS is notoriously more lenient to those who make a good-faith effort to properly pay their taxes.
Step 1: Figure Out How Much You Owe
This can be the most frustrating part for crypto-traders. To accurately calculate how much you owe in capital gains, you have to know what the Fair Market Value of the cryptocurrency was at the time of the trade. For traders who have executed hundreds, if not thousands of trades over the years, this can quickly become a difficult task.
If you have not been keeping track of the Fair Market Value for all of your trades, you can use Crypto Tax Software to automatically generate your complete capital gains or capital losses tax report. This report will not only determine the Fair Market Value at the time of each trade, but it will tell you the exact amount of gains or losses that you have for tax purposes.
Step 2: Amend Your Return
Once you have determined your capital gains liability, you should download a current IRS Form 1040X, Amended U.S. Individual Income Tax Return. This form comes with easy-to-follow instructions and requires you to only include new or updated information.
Step 3: Mail in your amended return
Send the IRS your amended return. Before you mail in your amended return to the IRS however, make sure that you’ve attached all necessary forms and supporting documents. If your your amendment results in a higher tax bill, you should include the additional tax payment with the return. It takes the IRS 8–12 weeks to process your amendment, so be patient.
You can also use tax preparation software like TurboTax cryptocurrency or TaxAct to handle the amendment. CryptoTrader.Tax automatically generates the necessary tax reports that can be imported into either of these platform and many others.
While paying taxes can at times feel like pulling teeth, it is very important that you include your crypto-trading activity with your tax return. A lot of traders are convinced that because of the anonymous, decentralized nature of Blockchain and crypto transactions, that there is no way for the government to see or know that they are making money trading/buying/selling cryptocurrency. Unfortunately this is not the case. The Blockchain is a distributed public ledger, meaning anyone can view the ledger at anytime. Figuring out an individual’s activities on that ledger essentially comes down to associating a wallet address with a name.
Disclaimer: This post is for informational purposes only and should not be construed as tax or investment advice. Please speak to your own tax expert, CPA or tax attorney on how you should treat taxation of digital currencies.