What happens when you don’t file Bitcoin taxes

Bitcoin’s value has increased over the years despite volatility concerns. That has enabled many early investors to generate huge returns as governments paid little attention to taxing such investments. However, things have changed today, with government regulators worldwide introducing new regulations and guidelines for taxing crypto. Visit BitIQ official site for more information on bitcoin trading.

According to the IRS, anyone who has sold crypto or used virtual currencies like Bitcoin to buy something since 2017 owes the government taxes. The agency has clearly outlined the various crypto taxable events and the penalties attributed to them in its Form 1031. The consequences vary based on the event and other factors determined by the regulator. Here are some things you can expect if you fail to file your Bitcoin taxes.

The Consequences of Not Filing Bitcoin Taxes

The IRS requires all taxpayers to record and report their crypto transactions when filing taxes. That enables them to determine whether you conducted a taxable event in Bitcoin within a given tax year. Those who fail to do so or misrepresent the facts by under-reporting their Bitcoin incomes are liable to a failure-to-pay penalty of 0.5% per month, starting from the day when you received the first income. The penalties could even increase to 5% in some cases.

If the IRS audits your tax returns and transactions and finds out that you did not report a taxable crypto activity, you may incur interest or criminal prosecution. Governments agencies may consider such an act tax evasion or fraud subject to harsh legal consequences. Chances of scrutiny are a bit lower due to the agency’s limited resources, but they usually pursue cases involving more significant amounts of money.

For instance, a significant difference exists between buying Bitcoin in 2012 and cashing out millions of dollars in 2022 versus small trades with $100 profits. Nevertheless, the IRS still requires you to disclose all crypto activities. The IRS has a three-year lookback for errors, but no statute of limitations exists for fraud.

Other risks may also come from whistleblowers reporting missing activity to the IRS for a percentage of the penalties. The IRS can also determine tax cheats through former business partners and spouses.

How to Determine If You Owe Taxes 

Most companies and individuals that fail to report and file Bitcoin taxes do so due to the lack of information regarding crypto taxes. The general rule is that you owe Bitcoin taxes if your funds have been used in any way and increased in value from when you first acquired them. However, there must be a taxable event such as selling crypto for fiat currency, using crypto to buy goods and services, and trading different types of virtual currencies.

You are required to record and report all the above transactions to the IRS when filing taxes to determine what you owe. The total amount you owe in Bitcoin taxes will depend on the particular transactions or taxable events and the cost basis. The latter refers to the amount you paid to acquire the Bitcoin in your possession.

The IRS stipulates taxpayers must report all their Bitcoin-related transactions via Form 8949. This process requires you to provide the name of the crypto, the date of its acquisition when you sold or traded the tokens, the generated proceeds or sales price, cost basis, and total gains or losses.

Overall, government agencies worldwide have increased their focus on crypto taxation in recent years. The failure to uphold your Bitcoin tax responsibilities could attract penalties, interest, and even criminal prosecution.