IRS audit

IRS Audits and Your Cryptocurrency: A Beginner's Guide

Cryptocurrency is exciting, but it also comes with tax responsibilities. The Internal Revenue Service (IRS) considers cryptocurrency as property, not currency, which has significant implications for how your transactions are taxed. This guide will help you understand the basics of IRS audits related to cryptocurrency and how to prepare. It's not legal advice, but a starting point for understanding your obligations.

Why the IRS Cares About Crypto

The IRS is increasingly focused on cryptocurrency transactions. They want to ensure people are reporting their gains (profits) and paying taxes on them. This is because crypto can be used to avoid taxes if not reported correctly. They do this through various methods, including matching reports from cryptocurrency exchanges and issuing summonses to exchanges to obtain user data. Ignoring your crypto tax obligations can lead to penalties, interest, and even legal trouble.

What Triggers an IRS Audit?

Several factors can increase your chances of being audited. These include:

• **Large Transactions:** Significant buys, sells, or trades of cryptocurrency can draw attention.
• **Frequent Trading:** Active day trading or swing trading can raise red flags.
• **Discrepancies:** Differences between the information you report and what the IRS receives from exchanges. For example, you report selling Bitcoin for $10,000, but the exchange reports a sale for $12,000.
• **Failure to Report:** Simply not reporting any cryptocurrency activity on your tax return.
• **Using Privacy Coins:** While not illegal, using coins focused on anonymity (like Monero) can attract scrutiny.
• **Mixing Services/Tumblers:** Using services designed to obscure the origin and destination of cryptocurrency.

Common Crypto Tax Mistakes

Many beginners make mistakes when dealing with crypto taxes. Here are a few common ones:

• **Not Tracking Transactions:** Failing to keep accurate records of all your crypto activity.
• **Incorrect Cost Basis:** Using the wrong price when calculating your profit or loss. Cost basis is what you originally paid for the cryptocurrency.
• **Ignoring Airdrops and Forks:** Treating free cryptocurrency received through airdrops or forks as non-taxable income. They usually *are* taxable.
• **Misunderstanding Like-Kind Exchanges:** Thinking you can defer taxes by trading one cryptocurrency for another (this is generally not allowed anymore).
• **Forgetting About DeFi:** Not reporting income from DeFi (Decentralized Finance) activities like staking, lending, or yield farming.

Record Keeping: Your First Line of Defense

The most important thing you can do to prepare for a potential audit is to keep excellent records. This includes:

• **Date of Each Transaction:** When did the transaction occur?
• **Type of Transaction:** Was it a buy, sell, trade, gift, or something else?
• **Cryptocurrency Involved:** Which cryptocurrency was involved?
• **Amount of Cryptocurrency:** How much cryptocurrency was involved?
• **Fair Market Value (FMV):** The value of the cryptocurrency in US dollars at the time of the transaction.
• **Fees Paid:** Any transaction fees paid.
• **Exchange Used:** Which exchange did you use for the transaction? Register now

You can use a spreadsheet, a dedicated crypto tax software (like CoinTracker or TaxBit), or a combination of both.

What Happens During an IRS Audit?

If you are audited, the IRS will request documentation to support your tax return. This may include:

• **Transaction History:** Records from your cryptocurrency exchanges.
• **Wallet Addresses:** The public addresses of your cryptocurrency wallets.
• **Tax Forms:** Copies of the tax forms you filed.
• **Supporting Documentation:** Anything else that supports your claims.

The audit can be conducted via mail, in person, or by phone. It's crucial to be honest and cooperative. If you're unsure about something, it's best to consult with a qualified tax professional.

Crypto Tax Software vs. Manual Tracking

Here's a comparison:

Feature	Crypto Tax Software	Manual Tracking
Ease of Use	Very Easy	Difficult
Accuracy	High (usually)	Prone to Errors
Cost	Can be Expensive	Free (but time-consuming)
Time Saving	Significant	Very Time-Consuming
Automation	Automated import of transactions	Manual entry required

Understanding Different Tax Events

Here's a quick breakdown of common tax events:

Tax Event	Explanation	Tax Implications
Buying Crypto	Purchasing crypto with fiat currency (USD, EUR, etc.)	Not a taxable event itself. Establishes your cost basis.
Selling Crypto	Selling crypto for fiat currency.	Taxable event. Capital gain or loss.
Trading Crypto	Exchanging one crypto for another.	Taxable event. Treated as selling one crypto and buying another.
Receiving Crypto (Airdrop/Fork)	Receiving free crypto.	Generally taxable as ordinary income.
Staking Rewards	Earning rewards for holding and validating crypto.	Taxable as ordinary income when received.

Useful Resources

• **IRS Cryptocurrency Guidance:** [1](https://www.irs.gov/cryptocurrency)
• **Publication 544 (Sales and Other Dispositions of Assets):** [2](https://www.irs.gov/publications/p544)
• **TaxBit:** [3](https://taxbit.com/)
• **CoinTracker:** [4](https://www.cointracker.io/)

Additional Resources for Further Learning

• Technical Analysis
• Trading Volume
• Moving Averages
• Relative Strength Index (RSI)
• Bollinger Bands
• Candlestick Patterns
• Market Capitalization
• Decentralized Exchanges (DEXs)
• Order Books
• Risk Management
• Start trading on Start trading
• Join BingX Join BingX
• Open account Open account
• BitMEX BitMEX

Recommended Crypto Exchanges

Exchange	Features	Sign Up
Binance	Largest exchange, 500+ coins	Sign Up - Register Now - CashBack 10% SPOT and Futures
BingX Futures	Copy trading	Join BingX - A lot of bonuses for registration on this exchange

Start Trading Now

• Register on Binance (Recommended for beginners)
• Try Bybit (For futures trading)

Learn More

Join our Telegram community: @Crypto_futurestrading

⚠️ *Disclaimer: Cryptocurrency trading involves risk. Only invest what you can afford to lose.* ⚠️