The good news is that taxpayers can amend past tax returns and include cryptocurrency taxes. The American tax system relies primarily on a compliance system that is voluntary. Therefore, the IRS expects citizens to report all of their taxable transactions. A failure to do so can attract heavy penalties and even criminal prosecution.
How Does the IRS Know that a taxpayer owes?
There are a few ways in which the IRS can determine if one has taxable cryptocurrency transactions or not. For instance, if after a crypto exchange the taxpayer receives a Form 1099-B or Form 1099-K, then the ‘matching mechanism’ in the IRS Information Reporting Program will highlight this. Also, if the crypto exchange receives a subpoena from the IRS then they may be required to disclose user account details. Therefore, if one has exchanges, spent, or sold cryptocurrency in the past, then it is important to report them as crypto tax for that year without fail.
How to Include Past Tax Returns?
The IRS allows taxpayers up to three years to claim any refunds or losses. While most IRS audits take the past three years into consideration, some can go even further back. In case a taxpayer has not reported past years’ crypto transactions in the tax filing, then this can be done in the following manner,
Step 1 - First they need to calculate how much is owed in crypto taxes in terms of capital gains. Tax preparation software platforms like TaxAct or TurboTax can be used to arrive at accurate calculation and manage amended tax.
Step 2 - The next step is to amend one’s tax return after calculating the overall capital gains liability. This amendment can be done using the IRS Form 1040X. It is a self-explanatory form and requires only information that is updated or new.
Step 3 - Once the form is completed the taxpayer mails this form to the IRS as the amended tax return. It is essential to attach all the required supporting documents to make sure that the form is complete in every aspect.
In the case the amended tax liability is a higher amount, then one must include the additional payment while sending across the amendment to the IRS. Also, it is important to know the Fair Market Value of all trade transactions for retrieving capital gains or losses. While this may not be an issue in case the transaction volume is low but can soon become an issue in case of large volumes. Therefore, it is recommended to file for crypto taxes in the same financial year.
Calculating and paying taxes can often seem like a tedious task, however, it is essential to incorporate all cryptocurrency transactions while filing annual tax returns. Even though it may seem that crypto transactions have an extremely decentralized and anonymous nature and the IRS may not have clear visibility on all cryptocurrency transactions to know whether the traders are generating revenues or not, this is certainly not the case.
There are enough and more software products in the market to help traders in the crypto tax filing process. These can be easily employed to ensure that one remains on the right side of the annual tax filing regime.