As the adoption of cryptocurrency becomes mainstream, the Inland Revenue Service (IRS) has wasted no time in introducing new rules and regulations. That being said, investors must keep in mind that delaying or failing to report your crypto CPA is more than a minor oversight, with it having the potential to cause serious legal and financial ramifications. At Onchain Accounting, we believe it is our responsibility to educate investors as their cryptocurrency accountant, and in this post, we’ll explain what happens when you fail to report your crypto taxes and how a crypto CPA can help prevent such mistakes from happening.
What are the kinds of crypto tax evasion?
According to the IRS, crypto tax evasion comes in two forms—the evasion of assessment and the evasion of payment.
Evasion of assessment
The evasion of assessment is when the taxpayer willfully omits to report or underreports their income or overstates their deductions. According to the IRS, between the two types of crypto tax evasion, the evasion of assessment is the most common.
Evasion of payment
On the other hand, the evasion of payment happens after the tax assessment has been made and the taxpayer hides the funds or assets that could be used to pay their tax liabilities. At present, this type of evasion is rare and thought to be unheard of in the crypto space.
What happens when you don’t report your crypto taxes?
As we mentioned in the beginning, failing to report your crypto taxes to the IRS can lead to serious financial and legal ramifications. The potential consequences can be one or more of the following:
- Penalties up to 75% of the value of the unpaid tax, plus interest on both the unpaid taxes and the penalties themselves. (E.g., if you fail to report $10,000 in crypto taxes, the IRS can impose a penalty of $7500. You will have to pay the penalty as well as the growing interest charge of the penalty.
- A maximum of $100,000 in fines for individuals and $500,000 for corporations
- A prison sentence of up to 5 years.
Keep in mind that the IRS is very strict on the enforcement of these rules. In fact, the arrest of Frank Richard Ahlgren III is the best example of how seriously the IRS takes non-reporting of crypto taxes. Ahlgren was charged and arrested in March 2024 for crypto tax evasion for underreporting and failing to report $4 million worth of Bitcoin sales and the associated capital gains in 2017 and 2019. Ahlgren’s case marks the first time an individual was arrested solely on the grounds of not reporting their crypto earnings in their tax return.
What is the role of the 1099-DA Form in IRS Crypto Enforcement?
The IRS Form 1099-DA, titled the ‘Digital Asset Proceeds From Broker Transactions,’ is the form that allowed the IRS to standardize the reporting of digital asset sales and exchanges by brokers, allowing all the parties involved to increase their tax compliance and enforcement.
At present, digital asset brokers are required to directly submit 1099-DA forms directly to the IRS. The IRS will use the data provided by the brokers and compare it with the tax returns filed by the taxpayer to check for discrepancies. If discrepancies are found, it can lead to IRS audits, penalties, and tax liabilities.
Conclusion
At present, it is clear that the IRS is getting serious about cracking down on crypto tax evasion and non-reporting. That being said, the best thing you can do to avoid the wrath of the IRS is to maintain proper accounting records and report all transactions with the help of an experienced crypto CPA. If you’re on the lookout for such a CPA, then Onchain Accounting has the solution for you. Our expert team of cryptocurrency accountants has been meticulously handling the accounting needs of 1000+ clients for over 8 years, ensuring that the IRS does not come knocking. If you want to experience our services firsthand, contact us now and schedule your consultation.
