There are many reasons why people might choose to invest in cryptocurrency, such as Bitcoin or Ethereum. These digital investments have seen major fluctuations in value. Each market change is potentially an opportunity to buy low or sell at a profit.
With the substantial shift in value of cryptocurrencies over the years, many people see them as viable short-term and long-term investment options. Cryptocurrency is also relatively private and hard to trace. Some people take for granted that their investments are undetectable and may make mistakes that result in significant income tax controversies.
What types of scenarios may lead to tax obligations and, therefore, potentially tax controversies related to cryptocurrency?
Cryptocurrency reporting is mandatory
The Internal Revenue Service (IRS) definitely monitors what people do with their money and the strategies people popularize for avoiding income tax obligations. The IRS has been aware of cryptocurrency as a common investment for many years, and there is formal policy in place regarding the need to report cryptocurrency holdings. More importantly, people must report the capital gains obtained when selling cryptocurrency.
While there may not be a centralized bank that retains records of all cryptocurrency holdings and transactions, trading platforms and other financial institutions must make disclosures to the IRS. As such, those who fail to report their holdings and profits derived from sales could be at risk of underpaying their taxes, triggering an audit or even facing significant financial penalties.
Those facing an audit or concerned about an IRS letter they’ve recently received regarding how they’ve reported their assets and earnings may need legal guidance to protect themselves. Working with an attorney after receiving an IRS letter related to undisclosed cryptocurrency investments or profits can help people minimize the consequences of an income tax controversy.