
Kryptoskatt becomes a member of INATBA, opening up opportunities to innovate in the crypto taxes space, and simplifying legal compliances for crypto investors
The term âTax evasionâ has been repeatedly associated with cryptocurrencies, the allegations going as far as to claim that tax evasion and money laundering are the only genuine use cases of cryptocurrencies.
However, thatâs far from reality, the legitimacy of cryptocurrencies has been verified by real-world applications like De-Fi, a massive online financial infrastructure that runs parallel to the physical network of banks and other financial institutions and operates at a similar scale within a decade of inception.
Crypto as an asset is new, and the regulations around it are precarious at best, which leads to a lot of confusion, with crypto taxes leading the conversation from the forefront. And this is one of the biggest reasons why people end up with unintentional tax evasion and tax fraud. A lot of people end up evading taxes because theyâre simply unaware of the intricacies of crypto taxes, tax evasion, and the regulations around them.Â
So hereâs a detailed primer on crypto tax evasion. By the time you reach the end of this extract, youâll know enough about tax evasion to not fall into it unintentionally.Â
Ok, so letâs set the groundwork for this conversation by answering the most basic question.
Crypto tax evasion refers to the illegal non-payment or underpayment of taxes on income generated through transactions involving cryptocurrencies.Â
This can include failing to report income from cryptocurrency trading, mining, or other activities, as well as failing to pay taxes on capital gains from the sale of cryptocurrencies. It is important to note that while it is illegal to evade taxes, it is legal to reduce your tax liability through legitimate means such as tax deductions and credits.
Now, tax evasion may be intentional or unintentional, however, if youâve bought, sold, traded, or have been gifted crypto in the past and fail to report these transactions in your tax report, the IRS will likely take interest.
The IRS categorizes crypto tax evasion into two sections:
Letâs understand them one at a time.
Evasion of payment occurs when someone decides to conceal the possession of assets or funds while the tax assessment is being conducted to avoid paying taxes on those assets or funds.Â
However, this kind of fraud is barely seen in the crypto space because itâs nearly impossible to conceal assets from the IRS after implementing the Form-1099 issued by crypto exchanges to report all customer transactions to authorities.
Evasion of assessment refers to the wilful underreporting of transactions or intentional overstatement of deductions to reduce tax liabilities to the IRS. This is the most common type of crypto tax evasion tactic used by wrong-doers to pay fewer taxes. The IRS is extremely cautious of such tax frauds and has released a comprehensive list of transactions that will be counted as evasion of assessment.Â
If you have participated in any of the transactions given below, it will be counted as an evasion of assessment by the IRS.
All crypto transactions are traceable because theyâve been recorded on the blockchain, sure they appear as anonymous transactions on the ledger, however, itâs just a matter of correlating those transactions with your wallet address and the KYC details with crypto exchanges(that is already shared with the IRS) to uncover your identity. Now, in case you decide to underreport crypto transactions intentionally or unintentionally, the discrepancies are immediately evident and you end up with trouble.
According to I.R.C §7206, any individual who fails to report their taxable income in their tax report can face fines of up to $100,000 and a maximum sentence of three years in prison. On the other hand, an individual found to be evading taxes could face a fine of $250,000 and up to five years in prison
According to a study conducted by CoinLedger in 2021, 25% of the investors who didnât report cryptocurrency on their taxes simply werenât aware that crypto was taxable. Now, this is an important statistic to uncover the fact that a huge majority of people who end up under the lens of the IRS for tax evasion, simply lack awareness. Partly, because a majority of crypto investors are young and unaware of the tax obligations that crypto transactions entail.Â
Here are some other reasons why people fail to report their crypto taxes:
The expansion of the crypto-verse was rapid, the pace was so magnificent that neither regulators nor investors could keep up with it. Crypto verticals like De-Fi grew to a multi-billion dollar market within a few years. With over $41 billion worth of assets locked in De-Fi as of December 2022, the IRS is yet to offer clarity on the taxation of De-Fi transactions in the US.
The lack of clarity on these transaction types inadvertently leads to underreporting of transactions and unintentional tax evasion or tax reports as reported by the IRS.
NFT transactions were in a similar space up until November 2022, when the IRS added instructions on how NFT transactions will be taxed under the âdigital assetsâ section of the new tax filing guide released on December 19, 2022.
Back when Satoshi Nakamoto facilitated the mining of Bitcoinâs genesis block and the worldâs first cryptocurrency was born, nobody had a clue that the crypto space would one day be home to 14,000 different tokens. There were no specialized tools to monitor and track crypto transactions.
Also, crypto was barely regulated, and there were no laws mandating the taxation of such transactions, so people had no incentive to track them. Those who were smart enough to predict the mass adoption of cryptocurrencies as a concept maintained a ledger of these transactions on excel sheets. And these ledgers were as accurate as humans can be.Â
Thankfully, the world has accepted the legitimacy of crypto as a concept and the tools have transformed to accommodate the requirements of investors. Modern crypto tax software like Kryptoskatt can create legally compliant tax reports within seconds based on your location, by auto-fetching your transaction details from all your wallets and exchanges. All you need to do is add your wallets and exchange profiles on the website and youâre done.
The IRS is fighting crypto tax evasion on multiple fronts:
If youâve unintentionally avoided crypto taxes in the past, donât worry it can still be fixed. Use tax software to make a list of all unreported or forgotten transactions and then use Form 1040X to amend your tax report. You should hear from the IRS within 8-12 weeks of returning your form to the IRS.
Alternatively, if youâve been formally notified by the IRS under tax evasion laws, you can use Form 14457 called the Voluntary Disclosure Practice Preclearance Request and Application which allows people to report previously unreported transactions to the IRS, even if they are facing criminal prosecution for violating tax laws.
If you have failed to pay or report taxes related to cryptocurrency in the past, making a voluntary disclosure to the IRS may help you avoid criminal prosecution. This involves cooperating with the IRS and paying any taxes owed in full. However, it is important to note that this option is only available if the IRS has not already begun an investigation.
If you evade taxes in the US, you may face penalties and fines, and in severe cases, criminal charges and imprisonment. The specific consequences depend on the circumstances of the evasion and the amount of taxes owed. It is important to comply with tax laws and file accurate returns to avoid potential legal issues.
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Tax fraud is the illegal act of intentionally providing false information on a tax return to pay less in taxes or receive a larger refund than is legally owed. Tax fraud can include underreporting income, claiming false deductions or credits, and failing to report all income. Tax fraud is a federal crime in the United States and can result in fines, penalties, and even imprisonment.
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Tax fraud and tax evasion are both illegal acts related to taxes, but they involve slightly different behaviors.
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Cryptocurrency tax evasion is not easy for several reasons: