There are several tax traps that people trading crypto are falling into without knowing, starting with FBAR information returns. Let’s understand what’s required, what the trigger events are, and how to handle these traps.

FBAR

FBAR information returns are required when a US taxpayer has a financial account based on any other country than the US. The Department of the Treasury has already ruled that all cypto exchanges not based on the US are subject to FBAR disclosures.

What’s FBAR? It’s an annual information report that discloses that you have a foreign financial account that had a balance in excess of $10,000 in USD value at any one point during that calendar year. It’s a separate filing from your Federal income tax return.

What does it matter that you haven’t filed your FBAR returns? For each year that you fail to file because you didn’t know about it, you can be fined up to $10,000 per account. If you know that you should be filing the FBAR returns and you’re simply not filing, the penalty can be up to $100,000 or 50% of the value in the account for each year whichever is higher. If you had $15,000 in value in a crypto account based outside the US and you were not filing even though you knew about the filing requirement, you could be fined $7,500 per year for each of the years you failed to file.

What to do to fix it

Catch up! Late file all of your FBARs. Your FBAR must include separate disclosures for each exchange on which you traded and had more than $10,000 in value at any time during the past five years or so. FBARs have to be electronically filed, We can help you get those returns filed.

The Next Tax Trap - trading crypto for crypto

It seems to be a great investment move - use some of your existing crypto to invest in a new crypto that’s on the rise.

Here’s the tax trap - this is not a like/kind exchange; this is a sale of the crypto you use to buy the new crypto with. You have to report this on your tax return for that year, and track the gain or loss you experienced on that sale.

What to do to fix it

You have to report each and every crypto transaction for all of your crypto investments using form 8949 and Schedule D to your personal tax return, unless you own the crypto through an LLC or other entity. If you’ve been filing your returns without reporting these transactions, you need to amend those returns before the IRS catches up to you. We can handle amendments for you, just give us a call and feel more secure.

Tax Trap #2 - bulk reporting, or not using FIFO

We’ve seen some returns where taxpayers reported their crypto activity, but in a single line item with totals and no supporting documentation attached. This is an inadequate filing and will bring about a request for more information from the IRS or a live audit.

What to do to fix it

Each and every crypto sale you make during a tax year has to be detailed on form 8949 using the FIFO (first in, first out) accounting method. If your exchange lets you download a spreadsheet of your transactions that show transaction date, purchase date, purchase price, sale price and any adjustments, you might can* attach this spreadsheet to your form 8949. Coinbase does provide such a spreadsheet, but it’s not presented in the transaction detail order required by form 8949.

This is going to require that you go back to the first transaction where you bought that particular crypto, and start tracking how much of it you’ve sold off. This is “first in, first out”. Some of these transactions, you’ll find that you need to split part of the sale between crypto that came in first, and the crypto that came in next. All of these values must be converted to USD if that exchange is denominated against a non-USD currency (Yen, for instance, or the South Korean Won). This is going to include every transaction where you used your debit card against your crypto balance to buy a cup of coffee - that’s a sale.

We can manage all of these calculations and valuations to create compliant form 8949s for you, and amend any year that you either didn’t file, or filed with incomplete crypto trade disclosures.

Tax Trap #3 - thinking that the IRS can’t find out about your crypto activity

Just last week, ARS Technica reported that Coinbase is turning over the records of 13,000 account holders to the IRS in response to a court order. The lawsuit brought by the IRS requested that Coinbase turn over all account holder data, and the court only approved 13,000 of these account holders. Should the IRS find that there was wrongful activity in a good portion of those 13,000, you can bet that the court will approve the IRS request for the balance of Coinbase account holders.

Have you used your Coinbase account balance to buy other crypto? Those transactions are going to be sent to the IRS in short order. Then, the IRS is going to know about those crypto investments.

Another thing, the IRS has discovered that social media is a great place to get information about people’s activity and habits when someone has come under official scrutiny. Have you bragged about your crypto activity on social media?

What to do to fix it

Amend. File. Report it all. Pay the tax on it before the IRS and Treasury come after you. A recent meeting between IRS and Treasury officials and CPA/tax preparers who are in an advisory panel revealed that the IRS and Treasury are moving directly to criminal prosecutions where it comes to unreported crypto and MMORPG revenue. If you have these transactions, get out in front of this ASAP.

You can’t walk into a franchise tax office, or do this on self-preparation software and be sure that it’s being done correctly.

Call us; we’re trained and ready to help you.

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