What Happens If You Fail to Report Cryptocurrency Transactions to the IRS?

 Introduction

The IRS classifies cryptocurrency as taxable property, requiring taxpayers to report all crypto transactions on Form 1040, Form 8949, and Schedule D. Failing to report crypto transactions can result in IRS penalties, audits, back taxes, and even criminal charges in extreme cases.

This guide explains the IRS rules on crypto reporting, the consequences of non-compliance, and how to correct unreported crypto transactions.

 Tax Code References for Cryptocurrency Reporting (IRC § 61 & § 6662)

• IRC § 61 requires all income, including crypto gains, staking rewards, and mining income, to be reported.
• IRC § 6662 imposes penalties for underreporting income or failing to disclose taxable transactions.
• IRS Notice 2014-21 classifies cryptocurrency as property subject to capital gains tax.
• IRS Revenue Ruling 2019-24 clarifies tax treatment for hard forks and airdrops.

 IRS Requirements for Reporting Cryptocurrency Transactions

Taxpayers must report all taxable crypto transactions, including:

• Selling cryptocurrency for fiat (USD)
• Trading one cryptocurrency for another
• Spending crypto on goods or services
• Receiving crypto as payment or mining rewards
• Staking rewards and airdrops

All crypto gains and losses must be reported on Form 8949 and Schedule D, and crypto income is reported on Schedule C or Form 1040.

  Penalties for Failing to Report Cryptocurrency Transactions

Failing to report crypto transactions can lead to severe IRS penalties, including:

  IRS Enforcement Actions and Crypto Tax Audits

The IRS has increased crypto tax enforcement, using the following methods:

• Crypto Exchange Reporting – Exchanges issue Form 1099-K or 1099-B, reporting transactions to the IRS.
• Blockchain Tracking – The IRS partners with blockchain analytics firms to track unreported transactions.
• Crypto Tax Audits – The IRS audits taxpayers who fail to disclose digital asset transactions.
• John Doe Summons – The IRS requests user data from crypto exchanges to find non-compliant taxpayers.

 How to Correct Unreported Cryptocurrency Transactions

Taxpayers who fail to report crypto transactions should take immediate action to correct their filings.

Option 1: File an Amended Tax Return (Form 1040-X)

• If crypto transactions were omitted from previous tax returns, file Form 1040-X to correct the mistake.
• Report capital gains/losses on Form 8949 and Schedule D.

Option 2: Voluntary Disclosure to the IRS

• If a large amount of income was not reported, taxpayers may qualify for IRS voluntary disclosure programs to avoid criminal penalties.

Option 3: Pay Back Taxes and Penalties

• If the IRS assesses back taxes and penalties, pay the amount owed to avoid further enforcement actions.

  Example Scenarios of Crypto Non-Reporting Consequences

Example 1: Airdrop Not Reported as Income

• Mike received $5,000 worth of cryptocurrency from an airdrop.
• He did not report it as taxable income.
• The IRS flagged his return, issued a CP2000 notice, and assessed penalties and interest.

Example 2: Failing to Report Crypto Sales

• Sarah sold Ethereum for a $20,000 profit but did not report it on her tax return.
• The IRS received Form 1099-B from her exchange, showing the sale.
• She was audited and charged penalties for underreporting income.

Example 3: Not Filing an FBAR for a Foreign Exchange

• John held $100,000 in cryptocurrency on an offshore exchange.
• He did not file an FBAR (Foreign Bank Account Report).
• The IRS assessed a $10,000 penalty for non-disclosure.

  Step-by-Step Guide to Avoid IRS Penalties for Crypto Transactions

Step 1: Answer the Digital Asset Question on Form 1040

• If you bought, sold, or received cryptocurrency, answer “Yes”.

Step 2: Gather All Crypto Transaction Records

• Obtain records from crypto exchanges, wallets, and blockchain transactions.
• Use crypto tax software to organize transactions.

Step 3: Report Crypto Sales and Trades on Form 8949

• List each crypto sale or trade, including:
• Date acquired
• Date sold
• Purchase price (cost basis)
• Sale price
• Capital gain or loss

Step 4: Report Crypto Income on Schedule C

• If you earned crypto from mining, staking, or freelance work, report it as self-employment income.

Step 5: File Corrected Returns if Necessary

• If past crypto transactions were not reported, file Form 1040-X to amend previous returns.

Step 6: Pay Any Taxes Owed

• If the IRS assesses penalties or back taxes, pay promptly to avoid additional interest charges.

 IRS Compliance Requirements

To comply with IRS crypto tax rules:

• Report all taxable crypto transactions on Form 8949 and Schedule D.
• Maintain detailed transaction records for at least three years.
• File an FBAR if holding more than $10,000 in foreign crypto exchanges.
• Use reputable crypto tax software or consult a CPA to avoid misreporting.

Non-compliance may result in IRS audits, penalties, and legal consequences.

  Conclusion

Failing to report cryptocurrency transactions can lead to IRS audits, back taxes, and significant penalties. The IRS has increased enforcement efforts to track unreported crypto income, making accurate tax reporting essential.

For expert crypto tax reporting and compliance assistance, taxpayers can consult Anshul Goyal, CPA EA FCA, a Certified Public Accountant and IRS compliance expert, to avoid penalties and ensure accurate filings.

  FAQs

1. Will the IRS know if I did not report my crypto transactions?
Yes, the IRS receives 1099 forms from crypto exchanges and uses blockchain tracking tools to detect unreported crypto transactions.

2. What happens if I forgot to report crypto from previous years?
Taxpayers should file an amended return (Form 1040-X) and report all past crypto transactions.

3. Can the IRS audit me for not reporting crypto?
Yes. The IRS is actively auditing taxpayers who fail to report cryptocurrency transactions.

4. Can I avoid penalties if I correct my crypto tax return?
Yes. If a taxpayer voluntarily amends their return before an audit, the IRS may waive some penalties.

5. Do I need to report crypto if I only bought and did not sell?
No, buying and holding crypto is not taxable, but taxpayers must still answer the Form 1040 digital asset question.

  About Our CPA

Anshul Goyal, CPA EA FCA, is a Certified Public Accountant (CPA) and IRS compliance expert specializing in cryptocurrency taxation.