You Do Owe Taxes on Crypto Sales: The Danger of Underreporting

In 2014, the United States government ruled that cryptocurrency, although still not fully legal, was a taxable asset. In the years since, many have tried to get around the regulation, only to suffer serious consequences.

If you sold cryptocurrency in 2024, you likely owe taxes on your gains. Read on to learn all about the taxes you owe on cryptocurrency and the repercussions you could face if you try to evade the tax authorities.

What Taxes Must You Pay on Cryptocurrency?

The taxes you have to pay on cryptocurrency holdings will vary depending on your country of residence. Most countries charge some form of taxes on cryptocurrency, the biggest of which is the United States, so we will discuss those regulations here.

Cryptocurrency holders in the United States are required to report all crypto sales, conversions, payments and income to the United States tax authority, called the IRS. The good news is, if you just buy crypto and hold it, you don’t owe anything—yet. So, if you only bought in 2024, you could jump down to the next section.

If you did anything other than buy cryptocurrency in 2024, you likely owe taxes. If you sold your assets for a gain (meaning more than what you paid for them), these gains are taxable. Of course, if you lost money on another token and sold it for a loss, it can be a good idea to sell both assets in the same year to offset your gains. In the US, capital gains taxes range from 0%-25%, depending on your income level and whether or not you held the asset for the short or long term.

If you simply traded your assets in 2024, unfortunately, this is also subject to taxes. The IRS sees trading an asset as selling the first asset to buy the second. These transactions are still subject to capital gains taxes—so be cautious with how often and in what amounts you trade.

The last category is for those who earned or received cryptocurrency as income. This could be from activities like mining or staking. No matter how you got them, they are taxed as income, at your specified rate. Be aware, since these count as income, they may bump you to a higher tax bracket, causing you to be taxed at a higher rate than you are accustomed to.

The Consequences of Not Paying Cryptocurrency Tax

When Bitcoin first launched, rumors circulated that it was “private” and “untraceable,” but it is critical that you understand this is no longer the case. All transactions on the blockchain are placed on a ledger which is accessible by the United States Government.

Although it may take them a while to find the perpetrators of certain transactions, they have proven that they are able to find almost anyone, even if you use private sales and mixers to try and obscure your holdings. Therefore, it is not advised to try and obscure your cryptocurrency sales or transactions from the US government—as they will likely find you in the end.

One example of this is Frank Richard Ahlgren III, a Texas resident who is currently in prison for tax evasion. He sold several thousands of dollars of cryptocurrency between 2017-2019 and only reported some of his capital gains. The US government traced him through the blockchain, even though he used mixers, and arrested him. In addition to a 2-year prison sentence, he has also been ordered to pay $1.1 million in restitution.

Another more nefarious example is in the case of James Zhong, a man who scammed The Silk Road platform of over 50,000 BTC. Although Zhong used multiple wallets to try and obscure his movements, the FBI was able to link one of his wallets to him, and the moment stolen funds (which they were monitoring on the blockchain) moved to this wallet, it was game over for Zhong. He was sentenced to 1 year in prison and forced to relinquish all of his Bitcoins to the US government.

As you can see, the US government, though they were initially in the dark, now employs some of the best on-chain sleuths, so it is not a good idea to try and hide your cryptocurrency sales or transfers from them.

How to Report Your Crypto to the US Government

Below is an easy 5-step process for reporting your cryptocurrency to the US government. Of course, this is not official tax advice, so if you have any questions or concerns, please seek out a tax professional in your area.

Step 1: Get Records

You’ll need records of all your cryptocurrency transactions during the year. Both sales and purchases. Use these to sum up your gains and losses (some investment platforms do this for you).

Step 2: Use Form 8949

Form 8949 will allow you to detail your cryptocurrency gains and losses. If you use an online tax service like TurboTax or H&R Block, there should be a section for cryptocurrency.

Step 3: Totals Go to Schedule D

Once you have your net gains and losses, include this on Schedule D.

Step 4: Report Crypto Income on Schedule 1

If you earned crypto from staking or mining, you’ll need to include these numbers on Schedule 1.

Step 5: Ask Questions

Do you have a situation that isn’t covered in these four steps? Then, we highly recommend scheduling a session with a tax professional. They can help ensure you report your cryptocurrency holdings correctly to the US government.

Overall, cryptocurrency holdings can be a real pain around tax time, and it can be scary to see the consequences some individuals face for not reporting their cryptocurrency to the government. To ensure nothing bad happens to you, ensure you are informed of the process of reporting cryptocurrency holdings to the US government, and if you have any questions, ask before you file. Remember, Bitcoin isn’t private and transactions can be tracked.

Related: Do You Have to Pay Taxes on NFTs?