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Cryptocurrency Taxes: CP2000 and What Crypto Traders Need to Know
The IRS has accelerated its priority of enforcing reporting of any cryptocurrency transactions because the agency treats crypto similar to stocks and taxable events.
“When it comes to any IRS compliance issue – the thing the IRS cares the most about – is material failure to report,” San Francisco cryptocurrency tax attorney Alex Kugelman said on The Mark Milton Show podcast. “If you buy crypto as an investment, then sell it for a gain, the IRS expects you to report the gain on your taxes as you would any other stock gains. Anybody can understand that’s a taxable event, and if you don’t report a taxable event then it becomes an issue.”
Kugelman joined the podcast with St. Louis tax attorney Mark C. Milton to discuss why cryptocurrency causes tax issues for so many traders.
“If you actively engage with cryptocurrency transactions, then you should ask yourself this simple question to understand if you are at risk of an IRS CP 2000 audit: have you reported crypto activity on your tax returns?” Kugelman said.
If the answer is no, then you’ll want to talk with a crypto tax attorney immediately to proactively file amended returns to account for the activity before it becomes an issue with the IRS. If the answer is yes, then you want to make sure you put in a good faith effort toward reporting the correct taxable amount.
Crypto traders need to be in the habit of keeping good records and accounting of their activity, which is where Kugelman Law’s crypto CPA and crypto accounting team can help.
Most issues with crypto compliance result because it’s complicated from a reporting standpoint, according to Kugelman. Many people are used to a standard brokerage account where they receive an already completed 1099-B at the end of the tax year recording gains or losses that is also reported to the IRS so it’s basic and clear what they need to include on their tax return.
But cryptocurrency hasn’t gotten to that cut and dry point yet.
“So, what happens is you engage in a lot of activity, trades that are taxable events, and you get to April 14 and are confused trying to figure out what should be reported,” Alex said. “To piece that together can be complicated and that’s where most people have issues answering the questions of, ‘What is the gain? Is there a gain?’ And that can end up being a more complex accounting exercise than the average person wants to deal with.”
Typically, when the IRS notices such a discrepancy, the agency will issue a CP2000 notice to the taxpayer that indicates there is a discrepancy between what the third party has reported as taxable events to the IRS versus what the taxpayer has filed on their returns.
If you have received a CP2000 notice and/or otherwise engage in crypto trading, then it’s important to consult with a California cryptocurrency tax attorney to ensure you are protected from the IRS.
Watch: https://www.youtube.com/watch?v=CuoXOqjyv94
