Despite the word “currency” in its full name, there are many people who treat digital cryptocurrency differently than traditional earnings and assets, especially when tax time rolls around.
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Presuming that the Internal Revenue Service (IRS) isn’t able to detect digital transactions — and that they consequently don’t need to be reported — is the No. 1 mistake crypto traders make, according to certified public accountant and CoinTracker tax expert Shehan Chandrasekera.
“People still think that crypto is kind of invisible to regulators,” Chandrasekera told CNBC Make It. “Truthfully, there are so many ways the IRS knows you’ve had something to do with crypto.”
Everyone who files a Form 1040 (Individual Income Tax Return), 1040-SR (U.S. Tax Return for Seniors) or 1040-NR (U.S. Nonresident Alien Income Tax Return) has to report all digital asset-related income — convertible virtual currency and cryptocurrency, stablecoins, non-fungible tokens (NFTs) — when they file their 2023 federal income tax return.
Not receiving a 1099 miscellaneous form shouldn’t be taken as a reason to avoid declaring cryptocurrency activity on your income tax return, and you shouldn’t rely on 1099s sent from centralized exchanges that trade across different markets or platforms, using their own self-custodial wallets, said Chandrasekera to CNBC.
As crypto mining multiplies and digital currency gets adopted by more Americans, regulations pertaining to tax filing will get easier. But it’s smart to understand the tax implications now. Here are five mistakes you don’t want to make when filing crypto earnings and transactions.
1. Not Filing Crypto Transactions at All
As mentioned above, anyone who interacted with cryptocurrency in the past year — received, sold, sent, exchanged or acquired interest — will need to report this activity on their taxes. The IRS updated Form 1040 to include a mandatory question at the top for the 2022 tax year.
Assuming (or hoping) that the IRS will never know about transactions involving digital assets and failing to report them can have severe consequences. In the U.S., it can lead to fines and penalties (up to $100K) or even jail…
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