Can the IRS Track Crypto?

How does the IRS categorize crypto?

The IRS sees cryptocurrencies like Bitcoin and Ethereum as property, much like a stock or a home. As such, your crypto is subject to capital gains tax. Once you sell, trade, or use your crypto to buy something, it is subject to capital gains tax. You will incur a capital gain or a capital loss depending on whether the value of your crypto increased or decreased between the time you bought it and the time you got rid of it.

More recently, the IRS has begun to see crypto as ordinary income. In the cases of those who mine, stake, or receive crypto through airdrops, the value of the coin is treated as no different than a payment from an employer. If you mine $300 worth of Ethereum, then you’ve increased your income by $300.

...Have you noticed it yet?

The IRS is effectively double-taxing your crypto! First through income tax when you receive it, then through capital gains tax when you dispose of it.

When faced with these facts, it’s no wonder that some taxpayers will try to evade reporting their crypto to the IRS. However, as we’ve previously stated, that’s a very bad idea. The IRS has the capability to track your crypto.

How does the IRS track crypto?

There are a few ways that the IRS tracks who and who doesn’t have crypto, but by far the most impactful method will be through Form 1099-Bs, which are sent out before April 15th. This form is expected to skyrocket crypto tax compliance within the American people, as exchanges like Coinbase and Binance send reports on individuals’ trades directly to the federal government. If taxpayers do not fill out Form 1099-Bs, or if they omit details, the IRS will know.

We go into more detail on this topic in our deep-dive on the 2021 Infrastructure Bill. There are a few issues with the government’s plan with the 1099-Bs, but it is safe to assume that the government will have a good idea of who has crypto, who doesn’t, and who is attempting to commit tax evasion.

Form 1099-B Basics

A Form 1099-B refers to the proceeds from an exchange. Exchanges like Binance and Coinbase are expected to summarize their customers’ annual gains and losses. These are then subject to capital gains taxes.

A Form 1099-B takes three forms: Copy A, Copy 1, and Copy B.

Copy A is filed by the exchange and sent to the IRS.

The exchange also files Copy 1, which is sent to whichever state the customer is in.

Finally, Copy B is sent to the customer (you) so you can file your taxes.

If your copy, Copy B, is different from Copy A, the IRS will immediately know that you are trying to commit crypto tax evasion.

Can you hide your cryptocurrency from the IRS?

You can definitely try, but ask yourself: is it worth risking five (5) years in prison and a $100,000 fine?

If the IRS gets the inclination that you are trying to commit tax evasion, it will begin to comb through your financial documents much more carefully. The IRS is known to be extremely meticulous when it comes to its audits.

You can learn more about crypto tax audits here.

Not filing a return is the biggest mistake that a crypto holder can make. We don’t recommend it. Instead, we at Yoke Tax prefer to find new and interesting ways to save you money. A crypto tax audit is inevitable, but how much the IRS takes from you is a lot more flexible. A smart accountant can be the difference between you keeping hundreds of thousands, or losing it all.

How to pay low crypto taxes!

So we’ve established that nobody wants to pay taxes, but that it’s safer to pay them than to try and avoid them. If the Internal Revenue Service will insist on making your life difficult, why not minimize your tax liability as much as possible? We’ve come up with a variety of ways to do this.

One method is by utilizing the long-term capital gains tax rate. If you hold on to your cryptocurrency for at least a year before you sell it, then the IRS sets a 0% capital gains tax rate. There is one catch, though: your annual income must remain under a threshold. This varies by your filing status. Learn more here.

Alternatively, you can utilize our Charitable Remainder Trust (CRT) method. This is our favorite, but it can be very difficult to set up without a tax professional walking you through the process. This is a more long term solution and is best for those who are making large gains. Read the article here.

In the end, it’s down to you. You can let Uncle Sam take as much of your crypto earnings as he wants (and he will), or you can find people to help you save money without risking your financial safety.

Our primary goal at Yoke Tax is to do just that. Connect with us for free and let us handle the numbers.