By the end of August, an estimated 10,000 taxpayers will receive letters from the IRS warning them that they may owe back taxes on unreported cryptocurrency earnings. While it might not be immediately obvious, you must include cryptocurrency earnings when you file federal taxes. As with tax evasion for traditional currency, anyone convicted of evading crypto taxes could face up to five years in prison and a fine of up to $250,000.
In a press release, IRS Commissioner Chuck Rettig said:
"Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties. The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations."
The IRS considers cryptocurrency taxable just like any other property transaction. If you're paid in crypto by an employer, your earnings are subject to federal income tax withholding and payroll taxes. If you earn cryptocurrency as an independent contractor, you'll have to file a 1099. If you sell crypto, you could have to pay capital gains tax, and if you're mining, that should be reported in your gross income. While cryptocurrency may have once felt cutting edge, getting a letter from the IRS stating that you owe back taxes makes it automatically less cool.