There are a variety of traders who want to escape cryptocurrency taxes. It is never thought to be a bad idea, but there are certain complications in this whole process. With the continuously expanding size of the crypto ecosystem, more resources are allocated by the federal government for cracking down the fraudulent activities on crypto taxes.
The present blog deals with all details required for the procedure through which IRS finds the cryptocurrency transactions. There are also some simple procedures which help in reporting the cryptocurrency tax returns within minutes.
Crypto Transactions with Anonymous Wallets
The nature of cryptocurrency transactions is partially anonymous. There are a variety of investors who think that they can never be traced out. This assumption is not valid at all. The transactions of the blockchain are apparent to the public. The Bitcoin and Ethereum blockchain are prime examples of this procedure.
IRS Track Crypto Transactions and Crypto Taxes
This public visibility means that IRS can track down the crypto transaction. They do it by matching the transactions of known individuals and anonymous transactions. Previously, IRS has partnered with crypto tracking companies, for example, Chain Analysis which helps crack down on tax frauds and blockchain transactions.
IRS And Major Crypto Exchanges
Now the question arises if IRS can track all of the virtual currency, capital gain, financial interest and ordinary income, then do all the major cryptocurrency exchanges report to the IRS for their tax forms, annual income tax returns and tax laws to IRS? Let’s get through the answer to this question.
Suppose you are an investor and have done the sign-up process for a cryptocurrency exchange. In that case, you may have provided the information, which includes your name, Date of birth, birthplace, Identity card or passport number etc.
The cryptocurrency exchange collaborates with various major exchanges to operate within legal boundaries. In the United States, The KYC (know your customer) process is mandatory because legal requirements put the KYC process as a fundamental part of legal boundaries.
IRS has the authority to take these records from the exchanges. Previously, IRS has issued some notices to more extensive exchanges, which include Kraken and Coin Base, for unavailability of KYC requirements. Additionally, many exchanges delivered 1099 forms to their customers because IRS was tracking down their crypto transaction history and activities.
Shortly, IRS may acquire more information regarding cryptocurrency investors and their crypto transactions. It is also believed that in the upcoming years, it will be possible for all cryptocurrency investors to deposit their entire data to IRS because IRS will have full authority and technology for tracking down the whole transactional history.
Crypto Exchange That Reports Taxable Income
A variety of crypto exchanges report their taxable income to the IRS. The crypto exchange that has issued 1099 forms involves Coin Base, Kraken, Gemini, Crypto—US, Robinhood, and PayPal.
Crypto Exchanges That Do Not Report IRS
There are certain crypto exchanges which do not report to IRS. There is a small list of crypto exchanges with few names that do not acquire the KYC process and must provide their customers with 1099 forms. This exchange includes more prominent names such as KuCoin, MexC and HODL HODL.
There are many exchanges which put restrictions on customers. These restrictions do not allow the trade without providing a KYC process. You can understand it with the help of a simple example. If you are investing in a crypto exchange, you need to v verify your identity for making derivate trades and crypto trading on MexC.
Additionally, it is mandatory to remember that all the crypto exchanges not sending their tax reports to the IRS need to evaluate their policies because, soon, governmental authorities in the USA can track down the tax-evading discussion for each transaction they made. Previously Binance has also improved its policies regarding KYC policies to respond to the pressure of the government.
Purpose Of Federal Income Tax Purposes
Usually, this is a frequently asked question. What is typically the purpose of inflicting the tax on the public? The first reason can be that this tax amount is later used for the betterment of citizens. Additionally, this tax amount proves that a person earns a specific amount through a particular channel.
When government inflicts a tax amount on investors, they also offer the security of their investments. Hence, the first loophole of escaping tax is that if you lose your investment in a cryptocurrency scam, there are chances that you will be re-scammed to get that money back.
If you pay off your taxes, there is a fair chance that you will own your invested money, no matter how many security breaches and fraudulent activities are done by hackers. Your investments will be saved on behalf of the governmental organizations.
This is because there is an internal revenue code on which the tax system relies for tax returns. This tax ratio is implemented per the fair market value, capital gains and trade of capital assets in the following tax year. Government agencies require crypto exchanges to report the taxpayer identification number.
IRS Questions For MY Cryptocurrency
The following section, concerning for many investors, is what will happen when they own cryptocurrency. What will be the behaviour of the IRS towards them? What questions would be asked if they were presented in front of the IRS?
There is no doubt that the IRS has increased the level of security for crypto transactions. In recent years, some questions have been added to the 1040 forms. One of the questions asks if they have done transactions during the tax year duration.
What you remember is that answering this question yes will not result in any increase in tax liability. This question has only one purpose: to add more information to their database regarding the ecosystem of digital assets.
If you lie on this question and answer it in no time, IRS can track down the transaction history, which will put your crypto account, among other red-flagged funds. They will keep your account under observation, considering that you lied to escape tax evasion.
Ways To Hide Cryptocurrency From IRS:
Initially, we suggest hiding your crypto transaction history because IRS has access to all the public cryptocurrency blockchain ledger. IRS computer system deploys tax forms on all the transaction logs, taxable events and user accounts, which earn long-term capital gains.
Tax evasion for reportable cryptocurrency transactions is a legal crime regarded as tax fraud with a penalty of five years. In addition, there is also a fine of one lac dollar for this. There is no way that any cryptocurrency exchange can offer you legal courses for tax evasion. There will be all grey or black ways which will cost you more money than your actual investment.
The only option that an investor is left with for crypto tax evasion is that you can make your crypto trade at a minimum investment level, which does not require the KYC process. Those transactions have records, but you can benefit from anonymous trading.
FAQs
There are some frequently asked questions for IRS and tax return capital gains. Let’s go through those questions to find the best situation and answer for the people who want to escape from tax.
Does IRS audit the crypto I own?
The answer to this question is a definite yes. Every tax-deploying company has an auditing authority. You will not know that IRS will be under-reporting the taxable income you earned during cryptocurrency trade.
The maximum limit for audit conduction is three years after filing for tax returns. In case of any fraud, IRS dares to go back as far as they want to get information about tax evasion.
Does IRS have the authority to track NFTs?
The answer to this question is also yes. Whatever thing has tax implementation is under the authority of the IRS. Either there is a wide range of crypto or NFTs; when there is a trade session, there will be tax deployment.
Is there any crypto exchange which does not report to IRS?
There are several crypto exchanges as well as decentralized exchanges which offer their services without KYC (know your customer) requirements. Those crypto exchanges, including Ku Coin and decentralized exchange, have the famous name Uniswap, which allows the transaction of crypto and fiat currency up to certain limits without providing KYC documentation.
There is a fair chance that crypto and decentralized exchanges will upgrade their terms and conditions regarding KYC. Binance has upgraded its rules and regulations for regulatory compliance.
This is due to the tax and security restrictions offered by the US government because soon, the US government and IRS will have complete control over the transactional history and tax return process.
What do I need to remember to report IRS for my cryptocurrency record?
There can be certain cases where you are not punished because there are some legal ways to extend your time duration for the tax return issues. If you still need to pay the tax on crypto investments and ROI, you can find a legal way for this.
Right now, you can apply for a file for the amended tax return. Though IRS is notorious for the tracking of taxes, the lesser-known fact is that IRS is also lenient for the people who want to have their commitments fulfilled in legal ways. It does not punish people who offer good intentions for paying taxes.