Crypto Tax Evasion Risks in the USA—Is It Worth the Gamble?

Cryptocurrency offers a unique blend of financial freedom and complexity. While it promises decentralized finance and exciting investment opportunities, it also presents a unique set of tax challenges. In the United States, the Internal Revenue Service (IRS) closely monitors cryptocurrency transactions, and failing to report them can have serious consequences.

This post will delve into the specific tax evasion risks associated with cryptocurrency in the USA, exploring the potential penalties, legal ramifications, and the importance of accurate reporting. We’ll examine real-world case studies and provide insights into how to navigate the complexities of crypto taxation responsibly.

Types Of Crypto Tax Evasion In America

Tax evasion in the crypto world is a serious offence. The IRS categorizes evasion crypto tax in the USAinto two main types:

• Evasion of assessment
• Evasion of payment.

Let’s break down each type and the consequences tied to them.

Evasion of Assessment

This is the most common form of crypto tax evasion. It happens when taxpayers intentionally misreport or hide their crypto-related income. Here are a few examples:

• Failing to report capital gains from selling or trading cryptocurrency.
• Underreporting the actual capital gains on crypto transactions.
• Not disclosing additional income earned through cryptocurrency.
• Avoiding reporting business revenue generated in crypto.
• Skipping reporting wages received in cryptocurrency.

The IRS takes this form of evasion seriously. If caught, you could face penalties including a 75% fine on the underpaid tax. In addition, criminal charges may lead to imprisonment of up to five years and fines of up to $100,000 for individuals. Businesses face fines as high as $500,000.

Evasion of Payment

Evasion of payment occurs after the IRS has already assessed your tax liability. This happens when individuals or businesses conceal assets or funds to avoid paying owed taxes. While less common in the crypto world, it’s still a significant concern.

Penalties for this include a 15% fine on the unpaid tax amount for each month, up to five months, with a maximum penalty of 75%. Failure to pay taxes or maintain proper records can also result in up to one year in prison and additional fines of $25,000 for individuals or $100,000 for corporations.

What Happens If You Do Not Report Crypto On Taxes?

The IRS makes it clear that cryptocurrency is taxable, and failing to report it on your taxes can lead to serious consequences. Tax evasion, including the failure to report crypto transactions, is considered a federal offence in the United States. If you do not report your crypto earnings, you could face significant penalties.

Penalties for not reporting crypto can include steep fines and even jail time. The IRS can charge you up to 75% of the tax due on unreported earnings. Fines can reach as much as $100,000 for individuals and $500,000 for corporations. In more severe cases, you could face up to five years in prison.

Recent actions show the IRS’s commitment to cracking down on crypto tax evasion. In 2024, the IRS prosecuted an individual for failing to report millions of dollars in bitcoin sales. This case serves as a reminder that the IRS is closely monitoring crypto transactions. If you’re caught, you may have to pay restitution, and fines, and even face prison time. It’s crucial to report your crypto earnings accurately to avoid these penalties.

How To Submit Amended Tax Returns in The USA?

If you missed reporting cryptocurrency on your taxes, don’t worry—it’s possible to correct the mistake. The first step is to determine what you owe in crypto taxes. You can make this process simpler by using a crypto tax tool, like Koinly, which helps calculate your tax liabilities based on your transactions.

Once you know your tax obligations, you can amend your return. To do this, use IRS Form 1040X, which is specifically for making corrections to previously filed returns. After filling out the form, submit it to the IRS. You can expect a response from them in 8 to 12 weeks.

In some cases, you may want to consider using IRS Form 14457, which is for voluntary disclosure. This form allows taxpayers who might face criminal charges for underreporting taxes to come forward. By voluntarily disclosing the information about virtual currency, you can avoid serious penalties like fines or imprisonment, as long as the IRS hasn’t already initiated legal action against you. Voluntary disclosure can be a safer way to handle missed crypto tax reporting.

Conclusion

Cryptocurrency offers immense potential, but its tax implications cannot be ignored. The IRS is actively pursuing cryptocurrency tax compliance, and the risks of non-compliance are significant. By understanding your tax obligations and seeking professional guidance when needed, you can minimize your exposure and ensure you’re navigating the crypto landscape responsibly. Remember, responsible crypto investing includes responsible tax reporting.