It’s increasingly clear the government is paying close attention to crypto, which means investors might want to take another look at their old tax returns.
Tax prep software company TurboTax has seen crypto transactions rise by a whopping 362% in tax year 2020 from 2019, according to Intuit data. But crypto tax reporting is coming along a bit more slowly, experts say. This could be a problem if you’ve invested in crypto in recent years, experts say, because if the IRS audits past returns and finds you didn’t properly report crypto gains, you could owe taxes on it.
“A lot of people who have been in this space for a number of years have come to me and said, ‘Hey, look, I haven’t been reporting for the last four years and now I’m realizing I need to report this year,” says Kate Waltman, a New York-based certified public accountant who specializes in crypto and blockchain assets. This oversight has had more to do with regulatory uncertainty than foul play, experts say, because consumers were waiting to see how the federal government would handle the burgeoning digital asset class.
Fortunately, it’s not the end of the world if you’re behind on reporting your crypto profits to the IRS — but you should probably consider adjusting returns that had any major omissions. Let’s look at why you might want to amend your old tax returns if you didn’t include your crypto gains in recent years.
When Should You Amend Your Tax Return?
The IRS encourages taxpayers to file an amended return if there is a significant change in their filing status from what they reported in a previous year. This includes marital status, income, deductions, capital gains, large gifts, or more information consumers failed to include inadvertently. Your unreported crypto income would fall into this category.
To amend a return, you would fill out Form 1040-X (Amended U.S. Individual Income Tax Return). Formal amendments are meant for adjustments that would change your tax return or amount owed, such as not including crypto capital gains taxes.
If you owe additional tax from unreported crypto gains, you can avoid excess penalties by filing an amendment swiftly and paying the tax before any due dates. Ideally, you should try to pay by the original due date for the tax reporting year (this is only possible if you’re adjusting last year’s return before your tax payments are due). Otherwise, try to pay by any due dates received after filing the amendment.
Currently, the normal processing time is up to 20 weeks, up from the usual 16 weeks. Some delays may occur in the case of errors, address changes, missing information, or routing mishaps (when sending information through the mail). The IRS recommends waiting it out instead of filing a second return or calling to check on status.
Can You Amend Your Crypto Tax Reporting From Past Years?
Crypto investors can amend returns already filed in recent years relatively simply. “You have a three-year window to amend prior year returns without any negative consequence,” Waltman says. That means you can electronically file an amended return application for years 2019, 2020, and 2021.
It’s always ideal to report all crypto capital gains from trades, nonfungible token sales, or other decentralized finance activity within the window of the reporting year in which you had the taxable transaction. But making a mistake isn’t anything to be ashamed of, says Waltman.
Using a crypto portfolio tracker may help you report more accurately at tax time and avoid forgetting about those crypto wallets floating around in the metaverse.
“Maybe you just genuinely didn’t know how or you didn’t have the help — there aren’t many CPAs in the [crypto] space today, let alone two or three years ago,” she says. For example, “if you pay [for anything] in crypto, you’re creating a taxable event for yourself and you will potentially have capital gains implications from that,” she says.
Most importantly, demonstrate a good faith effort and file your amendment in a timely way. Show as much documentation as you can, with well-calculated valuations using market data to back up valuations of any NFTs, altcoins, or other tokens you report to the IRS. You can work with your accountant to determine your gains and losses, and take advantage of third-party calculation tools, Waltman previously told NextAdvisor.
How to Avoid Crypto Tax Headaches in the Future
Keeping track of your crypto is one of the biggest obstacles to accurate reporting for both newcomers and seasoned crypto traders alike.
“People have been in this space for so long and finally, for the first time, are getting around to doing their [crypto] taxes,” says David Kemmerer, CEO and co-founder of crypto portfolio tracking software CoinLedger. “They don’t even remember all the various places they have crypto, and it does become very hard for them to reconcile everything.”
Now that you’re aware of the IRS’ crypto reporting requirements, experts recommend keeping good records of all your digital wallets, centralized exchange platforms, and balances for every account. A portfolio tracker, which links to your crypto holdings and offers a high-level view of your holdings, can be a big help to make future tax returns a lot easier. Depending on the tracker, you might be able to export your data to tax prep software, autofill IRS tax forms, and calculate your profits and losses.