Hackernoon logoWhat to Do If You Forgot to Report Your Crypto Trades On Last Year’s Tax Return by@lucaswyland

What to Do If You Forgot to Report Your Crypto Trades On Last Year’s Tax Return

Lucas Wyland Hacker Noon profile picture

@lucaswylandLucas Wyland

Between the recent IRS lawsuit 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 gains in prior years.

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? While this is a hotly debated topic on many-a-subreddit, the short answer is, yes. If you were buying and selling cryptocurrency at any point in the past few years, you owe a tax on the capital gain from your trades. If you want to learn why this is or exactly how the IRS treats crypto, you might want to read through our detailed guide: The Trader’s Guide to Cryptocurrency Taxes.

So what should you do if you already filed your return for 2017, 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 2017, or whichever year you didn’t include your crypto trades. You technically have three years from the date that you filed your return to file an amended return, and the IRS is notoriously much more lenient to those who make a good-faith effort to properly pay their taxes. And as the saying goes, it’s better safe than sorry.

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 an impossible task.

If you have not been keeping track of the Fair Market Value for all of your trades, you can use CryptoTrader.Tax to automatically generate your complete capital gains 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 you owe in taxes so that you don’t end up overpaying.

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. In this specific scenario where 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 (they aren’t a young, agile tech company).

You might consider uploading your Capital Gains Tax Report to a service like TurboTax or giving it to your tax professional to handle the amendment.

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 for these people, this is just not true. 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. You can bet that the IRS is only gearing up to become proficient at doing that. Ultimately, if you choose not to file your gains/losses, you will be committing blatant tax fraud to which the IRS can enforce a number of penalties, including criminal prosecution, five years in prison, along with a fine of up to $250,000.

Easily report your cryptocurrency capital gains by using CryptoTrader.Tax.

Originally published at www.cryptotrader.tax on May 14, 2018.


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