How to Legally Shorten Your Crypto Tax Audit Period

What does the IRS ask for in a crypto tax audit?

A major selling point of crypto is its privacy. From the beginning, it was all about having an asset which the government has no control over. However, a crypto tax audit severely hinders this ideal. The IRS will ask you to disclose all crypto accounts which you own in order to tax you. Specifically:



• All wallet IDs and blockchain addresses owned by you
• All digital currency exchanges used by you, including your user ID, email, IP address, account number, etc

Once the IRS has this information, it will look for records of each and every transaction which you’ve made relating to crypto. This is because a crypto tax audit is made to look for taxable events- points where the IRS has a legal right to tax you.

On its website, the IRS asks for “the basis and FMV of each unit at time of acquisition… The date and time each unit was sold, exchanged, or otherwise disposed of… (and) the FMV of each unit at the time of sale, exchange, or disposition, and the amount of money or the FMV of property received for each unit...” amongst other things.

To parse through each requirement and how it affects you can take a lot of time. Indeed, it can get confusing. To avoid any frustrations, be sure to consult a tax professional as soon as possible. He or she will figure out exactly what you need to do to lower your crypto taxes.

Why don’t you want a crypto tax audit?

Whether you’re low income or high income, there’s one thing which binds all people: nobody likes paying taxes. As more people have entered the crypto market and have found success, they want to avoid getting their earnings taken away from them by the government. A crypto tax audit is exactly how the IRS takes your profits- they go through your tax return and look for justifications. Don’t give them any!

The less time that you give the IRS to go through your tax return, then the less likely the IRS is to actually find any mistakes. These mistakes, which can include anything from a misspelled item to an incorrect calculation, can lead to a variety of consequences. More importantly, however, is the fact that giving the IRS less time to do a crypto tax audit gives it less time to tax you more.

There are three ways to go about this: the three year rule, the six year rule, and the forever rule.

The rules of an IRS tax audit

Three Year Rule: The IRS has three years from the date of your tax filing to conduct an audit. If you file your tax return on April 10, 2021, then the IRS has until April 10, 2024 to conduct a crypto tax audit. After this date, the IRS will not audit your taxes unless it sees that you committed fraud or misrepresented your financial situation.

Six Year Rule: If you misrepresent your income by more than 25%, then the IRS may extend its power to audit your return. This extension from three to six years allows the crypto tax audit to become more meticulous, which leads to more taxes for you.

Forever Rule: Generally, we don’t recommend committing fraud (filing a false return or willfully attempting to evade taxes). In fact, it’s as bad an idea as not filing your tax return at all. If you do this, then the IRS has the legal right to audit your return indefinitely. You will be liable for back taxes forever, and the IRS will make sure to find every avenue to take each cent from you.

Once you understand all of these aspects of the crypto tax audit, it becomes a little more clear on how you can shorten it.

How to shorten your crypto tax audit

Simply be as thorough as possible. Be detailed and precise in everything which you report on your tax filing. Do not omit any information. The more errors you leave, the higher the risk of an audit. The IRS will find every opportunity to tax you if it gets the opportunity, so keeping the audit period to the minimum of three years is the best choice.

In the end, 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 you losing it all.