Do I need my crypto taxes fixed? Should I fix my tax return to report my cryptos better? Those are the questions that many traders are asking now that the IRS compliance campaign has begun sending letters to traders. For many traders, it was the first time they ever did any investing. Reporting these investments on their taxes was a new awakening for them.
So it is time to do a health check. It makes sense. Every year you go to a doctor to have your body signs checked for hidden problems. We can do the same thing with your tax return.
Do You Have an IRS Problem Already?
If you received a letter from the IRS with the letter number 6173, 6174, or 6174-A, you have a serious problem. The IRS is using data mining techniques to identify the most likely crypto traders who have failed to report their cryptos correctly.
If you got one of these letters, they have targeted you. You have a short window of time to amend your prior tax returns and seek tax amnesty to avoid penalties. In this post, I'm going to discuss these based on my free downloadable health check, Do My Crypto Tax Returns Need Surgery?.
Key Indicators That You Need Your Crypto Taxes Fixed
I’m going to let you in on four of the 13 questions that are in my free health check. In the downloadable PDF, I walk you through answering each question for each year that you’ve traded. The additional questions also look at what is on your previous tax returns. Then I ask some diagnostic questions to help you determine if you need your crypto taxes fixed.
- Did you have crypto mining or wage income paid in cryptos?
- Did you suffer significant loss from financial or Ponzi scams?
- How many crypto exchange accounts did you have? Do not include accounts from these U.S. exchanges: Coinbase, Coinbase Pro/GDAX, Bitquick, Bittrex, Gemini, itBit, Kraken, Poloniex/Circle, or Uphold.
- Would the combined total of all the maximum balances of these non-US exchanges be greater than $10,000 in value during the year? (Yes or No)
Discovering a Schedule B Problem
If you discover that you have a Schedule B problem in any given tax year, it is a serious problem. On Schedule B line 7A, the question is asked,
Did you have a financial interest in or signature authority over a financial account located in a foreign country?Schedule B, line 7A
A crypto exchange is a financial account. Almost all crypto exchanges are outside the United States1)Crypto exchanges located in the US are Bitquick, Bittrex, Coinbase, Coinbase Pro/GDAX, Gemini, itBit, Kraken, Poloniex/Circle, Robinhood, or Uphold. If you traded on foreign exchanges and didn’t answer yes to this question, you have committed perjury.
How did I commit perjury? Look on the first or second page of the 1040 tax return where there is a box for you to sign the return. In small print is the statement,
Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct and complete.form 1040
So if you have a schedule B problem, you have a perjury problem. The penalty for perjury is up to three years in prison.
My free downloadable health check helps you determine if you have this problem or not.
Could you have an FBAR problem?
If you have a Schedule B problem, then you definitely have an FBAR problem. Remember that question on line 7A? It also asks if you had financial accounts and if you are required to file Form FinCEN-114. The form then instructs the taxpayer to read this form and determine if the form is required.
Everyone with a financial interest in or signature authority over foreign financial accounts must report these on Form FinCEN-114, also called the FBAR form. And as mentioned above, almost all crypto exchanges are outside of the United States, so it’s very likely that you have ‘foreign accounts’.
The penalties for this are costly, $10,000 for each account not reported or even reported late. So you definitely want to make sure and deal with this as soon as possible.
READ MORE: Avoiding the IRS Crackdown
There’s a second anti-money laundering form?
My free health check also addresses Form 8938. This form and the FBAR form are the two anti-money laundering forms that individual taxpayers must file if they apply. Form 8938 overlaps with the FBAR form requiring the listing of the maximum balances of foreign financial accounts. Form 8938 also requires the listing of the total value of all crypto transactions, both buy and sell regardless of exchange when the counterparty to your trade is other than a US person2)Tax Code section 6038D. Since trades on crypto exchanges are anonymous, you must assume that the counterparty is a foreign person.
Failure to file this form when required is a $10,000 penalty, and it exposes you to a 40% foreign accuracy penalty. By the way, failure to file form 8938 on time is subject to a $10,000 penalty. The only way to avoid this penalty is to amend the tax return to use a tax amnesty procedure.
Navigating the Schedules
When you take the time to determine if you need your crypto taxes fixed, you should encounter all the schedules that are involved. There are Schedule C, Schedule D, and Schedule E.
My free health check makes sure to address each of these, explaining more about what are actually taxable events in crypto trading. You may be surprised.
Still Claim Like-Kind Exchange?
Many traders who did not report all their trades in 2017, did so because they were afraid of having to pay enormous taxes on their incredible gains. This dilemma became worse when the value of their holdings plunged in 2018, making the size of the tax bill more staggering.
The good news is that you can still claim like-kind exchange, save lots of money and protect yourself from massive penalties and taxes. For tax years 2018 and forward, like-kind exchange treatment for cryptos is no longer permitted, but it still can be claimed for prior years. I recommend it to most of my clients.
I have saved my clients over a million dollars in taxes by using like-kind exchange. My team has significant experience and success calculating and documenting these exchanges. We offer this service to our clients.3)We offer this service only to clients our Full-Service or CryptoTaxFixer package clients.
The Cure for Getting Your Crypto Taxes Fixed
What can be done to fix these problems? The first step is to determine if you need to. You can try to do it yourself or better yet, use my free health check. This free downloadable PDF goes more in-depth about various solutions.
You can amend prior tax returns by submitting a corrected return along with an explanation of changes. In my book, 10 Steps for a Great Crypto Tax Return, I explain how to prepare a defensive return that best protects you from the IRS and their data mining computers.
You can use one of several tax amnesty procedures to avoid the $10,000 late-filing penalties. These procedures involve filing a legal affidavit attesting to acting with reasonable cause and in good faith and not engaging in willful action or negligence. In my book, Tax Amnesty Made Easy, I explain how to determine the best amnesty procedure for your circumstance and how to do it.
Need more help to fix your crypto taxes?
At Donnelly Tax Law, we offer a full-service package and a do-it-yourself “CryptoTaxFixer” package offering to fix past tax returns. Avoiding $10,000 fines and using like-kind exchange4)The cost of like-kind exchange calculation depends on the number of trades and exchanges involved. can save a fortune when using these packages.
With our full-service offering, we help clients get significant tax credits for losses from Ponzi and other crypto financial scams. For one client, we got a $139,000 deduction because of a Ponzi loss which reduced their taxes to $0.
You Can Do It! Get Your Crypto Taxes Fixed
Remember that the IRS has already begun its compliance campaign. The time to correct past filing mistakes is now. If you already received the letter from the IRS, urgent action is needed. The IRS has said that they will withdraw the tax amnesty programs without notice in the future. Therefore, act now if you need amnesty before the programs disappear or you get caught by an IRS examination letter.
Footnotes [ + ]
|1.||↑||Crypto exchanges located in the US are Bitquick, Bittrex, Coinbase, Coinbase Pro/GDAX, Gemini, itBit, Kraken, Poloniex/Circle, Robinhood, or Uphold|
|2.||↑||Tax Code section 6038D. Since trades on crypto exchanges are anonymous, you must assume that the counterparty is a foreign person|
|3.||↑||We offer this service only to clients our Full-Service or CryptoTaxFixer package clients.|
|4.||↑||The cost of like-kind exchange calculation depends on the number of trades and exchanges involved.|