During the earlier days of digital assets, cryptocurrency was considered by many investors to be a “wild west” where people could do transactions away from the watchful eyes of the government. To some extent, it still is a “wild west,” but the assumption that transactions can be kept hidden from the government seems to have been disproven with the introduction of tax laws across the world to regulate it. Tax authorities like the IRS (USA), HMRC (UK), and others have gotten sophisticated tools to track blockchain activity. And there are serious financial and legal consequences for failing to report your crypto transaction income.
1. Financial Penalties and Interest
The main consequence of not reporting your crypto is the financial and legal consequences. Failing to report your transactions will incur a financial penalty for failing to file and for failing to pay. This can often result in the accumulation of penalties if done for multiple tax cycles.
2. The IRS “John Doe” Summons and 1099s
A lot of investors hold the belief that they will not be found out by the government if they fail to report their crypto transactions. This is not true, and most major exchanges are now required to file extensive reports of their business activities, and tax agencies have successfully used “John Doe” summons to force exchanges to hand over user data.
3. The “Exchange Shutdown” Complication
Another misconception is that you can escape your tax liability if an exchange shuts down or disappears by claiming loss of access to your transaction history. This is not true, as most tax authorities do not consider “lost records” a valid excuse for non-reporting. So even if you lost access to your transaction due to this, you should still try to use bank statements and blockchain explorers to determine what to report.
4. Criminal Charges and Fraud
Extreme cases of tax evasion have been known to incur civil penalties and even criminal prosecution. If it is proven that your non-reporting is to evade taxes, you might incur such penalties as well.
Disclaimer: BFM Times acts as a source of information for knowledge purposes and does not claim to be a financial advisor. Kindly consult your financial advisor before investing.
