Crypto Tax Audit From IRS

The rise of cryptocurrency has brought a new layer of complexity to the world of finance, and tax reporting is no exception. With the IRS increasingly scrutinizing crypto transactions, understanding how crypto tax audits work is crucial for any investor. This guide will break down everything you need to know, from how to get selected for an audit to what to expect during the process.

How to Get Selected for an IRS Crypto Audit?

While the IRS audits a small percentage of tax returns overall, there are certain red flags that can increase your chances of being selected for a crypto tax audit. Here are some common triggers:

• Inconsistent Reporting: Discrepancies between the amount of crypto you report on your tax return and the information the IRS receives from cryptocurrency exchanges can raise red flags.
• High Trading Volume: Frequent buying and selling of cryptocurrencies can attract the IRS’s attention, especially if large profits are involved.
• Unreported Income: Failing to report income from mining, staking, or receiving crypto through airdrops can trigger an audit.
• Suspicious Activity: If the IRS flags suspicious activity on your exchange accounts, such as transfers to or from anonymizing services, it may prompt further investigation.

Most Common IRS Crypto Audit Questions

Be prepared to answer a range of questions during a crypto tax audit. Some of the most common ones include:

• What types of cryptocurrency transactions did you have during the tax year?
• Did you keep detailed records of your crypto purchases, sales, and trades?
• Did you report all income from mining, staking, or airdrops?
• Did you use any margin trading or lending platforms?
• Did you claim any deductions or losses related to your cryptocurrency activities?

Here’s How a Cryptocurrency Tax Audit Works

An IRS crypto tax audit follows a similar process to a traditional tax audit. Here’s a general breakdown of what to expect:

1. Initial Contact: The IRS will typically initiate contact through a letter or phone call. This communication will inform you that you are under audit and outline the scope of the audit.
2. Information Gathering: You will be required to provide the IRS with documentation related to your crypto transactions. This may include exchange records, wallet addresses, transaction history, and any relevant receipts or invoices.
3. Examination: The IRS auditor will examine the information you provide to verify the accuracy of your tax return. They may request additional documentation or ask clarifying questions.
4. Proposed Adjustments: If the IRS finds discrepancies, they may propose adjustments to your tax return. This could involve additional taxes owed, penalties, or interest.
5. Negotiation and Appeals: You have the right to negotiate with the IRS auditor or appeal their decision. In most cases, it’s advisable to consult with a tax professional experienced in cryptocurrency taxation during this stage.
6. Resolution: Once any disagreements are settled, you will receive a final determination from the IRS outlining the final tax liability.

What Will I Need for a Crypto Tax Audit?

The key to surviving a crypto tax audit is meticulous record-keeping. Here are some essential documents you’ll need to have on hand:

• Transaction History: This includes records of all your crypto purchases, sales, trades, and exchanges. Ideally, you should obtain these directly from the cryptocurrency exchanges you use.
• Wallet Records: If you hold crypto in your own wallet, maintain detailed records of all incoming and outgoing transactions.
• Mining Income: If you mine cryptocurrency, keep track of your mining income and any associated expenses.
• Staking Rewards: If you earn rewards through staking, document the amount received and the date.
• Airdrop Records: Keep a record of any cryptocurrency you receive through airdrops.
• Tax Basis Calculations: Maintain documentation of the cost basis of your cryptocurrency holdings, which is crucial for calculating capital gains or losses.

How Long Does a Crypto Tax Audit Take?

The duration of a crypto tax audit can vary depending on the complexity of your situation and the responsiveness of the taxpayer. Simpler audits may be resolved within a few months, while complex cases involving significant discrepancies can take a year or more. To minimize discrepancies and stay prepared, it’s helpful to use a tax calculator like this to accurately track and calculate your crypto-related taxes. This can help ensure your filings are correct and reduce the likelihood of lengthy audits. 

Ways to Avoid a Cryptocurrency Audit

While there’s no guaranteed way to avoid an audit, here are some steps you can take to minimize your risk:

• Accurate Reporting: Meticulously track and report all your crypto transactions on your tax return.
• Detailed Records: Maintain clear and comprehensive records of all your crypto activity.
• Tax Professional Help: Consider consulting with a tax professional experienced in cryptocurrency taxation. They can guide you through the reporting process and ensure you’re compliant with tax regulations.
• Stay Informed: Keep yourself updated on the latest IRS guidance on cryptocurrency taxation. The

Can the IRS Identify My Cryptocurrency Transactions if I Don’t Report Them?

The short answer is yes, the IRS has ways to identify your cryptocurrency transactions even if you don’t report them. Here’s how:

• Information Sharing with Exchanges: The IRS has established information-sharing agreements with many cryptocurrency exchanges operating in the US. These exchanges are required to report certain information about their users, including total transaction volume and account details.
• Third-Party Reporting: Payment processors and other platforms facilitating crypto transactions may also be required to report information to the IRS.
• Blockchain Analysis: The IRS is actively investing in blockchain analysis tools that can track the movement of cryptocurrencies across the blockchain ledger. While not foolproof, these tools can help identify suspicious activity and potentially link transactions back to individual taxpayers.

How Our Tax Experts Can Help You During a Crypto Audit (Aurum FS Can Help You)

If you receive an IRS crypto audit notification, don’t panic! Aurum FS has a team of experienced tax professionals well-versed in cryptocurrency taxation. We can help you navigate the audit process by:

• Reviewing Your Records: We can assess your documentation and identify any areas that may need clarification.
• Communication with the IRS: Our team can handle all communication with the IRS on your behalf, ensuring a professional and productive dialogue.
• Representation and Advocacy: We can represent you during the audit process and advocate for your best interests.
• Tax Optimization Strategies: Our tax professionals can help you explore all available tax benefits and deductions to minimize your tax liability.

Don’t face the IRS alone. Contact Aurum FS today and let our team of tax experts guide you through the crypto tax audit process.

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