What Happens if I Don't File My Crypto Taxes?

Failing to file taxes on cryptocurrency transactions can lead to serious consequences, ranging from penalties to criminal charges. If you’ve been trading or earning crypto, understanding your tax obligations is critical to avoiding trouble with the IRS. Here’s everything you need to know about what happens if you don’t file crypto taxes.

Key Points to Know:

1. The IRS Treats Crypto as Property:
   • This means gains, losses, and income from crypto transactions must be reported, just like stocks or real estate.
2. Failure to Report Can Result in Fines, Audits, or Legal Consequences:
   • Ignoring tax obligations could lead to steep financial penalties or even prosecution in severe cases.

Consequences of Not Filing Crypto Taxes

1. Failure-to-File Penalties

If you don’t file your crypto taxes by the deadline, the IRS imposes failure-to-file penalties. This is usually 5% of the unpaid taxes per month, capped at 25%.

Example:

• You owe $2,000 in crypto taxes and fail to file for 3 months.
• Penalty = $2,000 x 5% x 3 = $300.

2. Failure-to-Pay Penalties

Even if you file your taxes but fail to pay the amount owed, you’ll face penalties of 0.5% of the unpaid amount per month, capped at 25%.

Example:

• You file on time but don’t pay $2,000 in taxes for 6 months.
• Penalty = $2,000 x 0.5% x 6 = $60.

3. Accruing Interest on Unpaid Taxes

In addition to penalties, the IRS charges interest on unpaid taxes. The interest rate is determined quarterly and compounds daily.

Example:

• You owe $1,000, and the IRS charges an annual interest rate of 4%.
• Daily interest = $1,000 x (4% / 365) = $0.11 per day.

4. Audits and Investigations

Failure to report crypto transactions increases the likelihood of an IRS audit. The IRS has tools like the "John Doe Summons" to obtain records from crypto exchanges and identify unreported transactions.

• Coinbase was required to share user transaction data with the IRS for accounts exceeding certain thresholds.

5. Criminal Charges

In severe cases, willful tax evasion can lead to criminal charges, including imprisonment for up to 5 years and fines of up to $250,000.

• A taxpayer intentionally fails to report $50,000 in crypto gains over several years. This could be prosecuted as tax fraud.

How to Avoid Penalties

1. File Even if You Can’t Pay

Filing on time, even if you can’t pay the full amount, helps you avoid failure-to-file penalties. You can work out a payment plan with the IRS for any unpaid taxes.

• You owe $5,000 but only have $2,000 on hand. Filing your return and paying what you can reduces penalties and shows good faith.

2. Amend Past Returns

If you forgot to report crypto transactions in previous years, you can file an amended return to correct the mistake.

• You missed reporting $1,500 in crypto gains last year. Filing an amended return can reduce future audit risks.

3. Use Tax Software

Tools like Awaken can simplify tracking and reporting crypto transactions by integrating with exchanges and wallets. It can:

• Automatically calculate gains, losses, and income.
• Generate IRS-compliant tax reports.

Examples of Taxable Crypto Events

Selling Crypto for Fiat

• You bought 1 Bitcoin for $30,000 and sold it for $50,000. The $20,000 gain is taxable.

Trading One Crypto for Another

• You exchanged $10,000 worth of Ethereum for $12,000 worth of Solana. The $2,000 gain is taxable.

Receiving Crypto as Income

• You earned $1,000 in crypto through freelance work. This must be reported as ordinary income.

Staking Rewards

• You received $500 worth of staking rewards. This counts as taxable income.

FAQs About Not Filing Crypto Taxes

1. What if I only had small crypto transactions?

Even small transactions must be reported. The IRS does not provide exemptions based on transaction size.

2. Will the IRS know if I don’t report?

Yes. Many exchanges share transaction data with the IRS, increasing the likelihood of detection.

3. Can I negotiate with the IRS if I can’t pay?

Yes. The IRS offers installment plans and compromise options for taxpayers who cannot pay in full.

4. Are wallet transfers taxable?

No. Transferring crypto between your own wallets is not a taxable event.

5. How far back can the IRS audit crypto transactions?

The IRS can audit up to 3 years back, but this extends to 6 years for substantial underreporting.

Conclusion

Failing to file crypto taxes can lead to severe penalties, including fines, interest, audits, and even criminal charges. By understanding your obligations and using tools like Awaken to automate the tracking and reporting process, you can stay compliant and avoid unnecessary stress. When in doubt, consult a tax professional for personalized advice.

Disclaimer

This article is for informational purposes only and does not constitute tax, legal, or financial advice. For specific advice regarding your situation, consult a tax professional or legal advisor.

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