Ever since Bitcoin reached mainstream media in 2017, the IRS has been escalating its efforts to detect cryptocurrency tax evaders. It’s Criminal Investigation division, or IRS-CI launched a Virtual Currency Compliance campaign focused solely on crypto.
Actions Taken
The Internal Revenue Service has been taking several measures to identify people who fail to report their cryptocurrency gains. Recently, it subpoenaed several crypto exchanges ordering the disclosure of user accounts, with the most notable one being Coinbase.
Additionally, Chainalysis, a blockchain analysis company was contracted to help identify the owners of digital wallets. The company deploys millions of tags to identify crypto transactions, and claims to have information on over 25% of all bitcoin addresses
The IRS also updated their tax forms for 2020, and will require every taxpayer to answer the following question: “At anytime during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”
How to Stay Compliant
To avoid penalties, interest, or even criminal prosecution in some cases, cryptocurrency owners should take a proactive approach when dealing with tax compliance. If you have a small number of transactions, it can be possible to calculate your tax liability yourself.
Firstly, you need to gather all your cryptocurrency transactions. Then, you need to determine your cost basis method. FIFO, LOFI, Low Cost, and others are viable options that can end up reducing your tax bill. Lastly, you calculate your capital gains/loss by subtracting your cost basis from the fair market value of every asset.
If you have more than 20 transactions, or want to take advantage of advanced tax-saving practices like optimized calculations, it might be better to use a crypto tax software. Users simply import their trades to the platform via CSV or API, experts then review the data and generate tax reports compatible with any filing service.
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