5 Cryptocurrency Mistakes that Will Get the IRS’ Attention in 2021News, Offshore Account Update
Posted in on March 19, 2021
If you owned cryptocurrency in 2021, you have an obligation to report all related gains and losses on your 2021 federal return. When preparing your return, however, you need to be extremely careful to avoid mistakes that could garner unwanted attention from the IRS. In this article, Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, discusses five common mistakes that have the potential to lead to IRS audits and investigations.
1. Incorrectly Calculating Your “Adjusted Basis”
In order to determine how much (if any) you owe to the IRS as a result of your cryptocurrency investments, you first need to determine your “adjusted basis.” As the IRS explains, “Your gain or loss will be the difference between your adjusted basis in the virtual currency and the amount you received in exchange for the virtual currency, which you should report on your Federal income tax return in U.S. dollars.” If you don’t start with an accurate “adjusted basis,” then your calculation of taxable income will also be inaccurate.
2. Incorrectly Calculating Your Tax Liability
In addition to inaccurately calculating “adjusted basis,” there are various other calculation errors that can lead to submitting a false return. For example, many investors make mistakes when calculating the value of their cryptocurrency at the time of sale or transfer. Since the IRS is emphasizing cryptocurrency tax compliance in 2021, any mistakes have the potential to lead to unwanted scrutiny.
3. Making Other Errors on Your Federal Return
Besides calculation errors, other errors on your federal return can also serve as “red flags” to IRS revenue agents. Even if you rely on an accountant or tax software to complete your returns for you, as the taxpayer, you still remain directly responsible for any errors contained in your returns.
4. Attempting to Make a “Quiet Disclosure”
If you have failed to properly report your cryptocurrency tax liability in the past, you may be thinking about slipping corrected information into your 2021 return. This is known as a “quiet disclosure,” and it is generally ill-advised. The IRS has established procedures for correcting past filing mistakes. If you attempt to make a “quiet disclosure” rather than submitting an amended return or an appropriate voluntary disclosure, you could easily find yourself facing additional fines and penalties.
5. Failing to Report Transactions Reported By Your Cryptocurrency Exchange
Due to the challenges involved in accurately reporting cryptocurrency transactions to the IRS, some taxpayers simply choose not to disclose these transactions on their returns. Not only is this a form of tax fraud, but it is a form of tax fraud that the IRS is very likely to uncover. The IRS collects information about taxpayers’ cryptocurrency transactions from their cryptocurrency exchanges; and, if your exchange reports a transaction that you do not, you can expect to hear from the IRS in 2021.
Questions or Concerns? Contact Virginia Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group
Do you have questions or concerns about your federal cryptocurrency tax liability? If so, Virginia tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, can help. To schedule a confidential consultation at Thorn Law Group, call 703-752-3752, email firstname.lastname@example.org or tell us what you need to know online today.Share This Post