The IRS requires that taxpayers report all income. Legal, illegal, under the table: Everything must be reported.

Cryptocurrency presents a new income stream for taxpayers, and some have failed to report it on their taxes. In response, the IRS Criminal Investigation Division is aggressively pursuing any cryptocurrency trader who fails to report income.

In 2024, the IRS reported the first criminal conviction of tax evasion related to cryptocurrency. This relates to the agency's increased investigations into cybercrimes.

The IRS classifies cryptocurrency as property, and the same rules for traditional property transactions apply to cryptocurrency. Failing to report income, underreporting income, or hiding assets can all potentially result in criminal charges.

The IRS's recent actions indicate that tax evasion is tax evasion, regardless of the type of asset. Taxpayers can avoid the potential for criminal charges by maintaining accurate records and treating cryptocurrency in a manner similar to other types of currency.

Reporting Cryptocurrency

As of January 2025, the IRS requires cryptocurrency traders to maintain records that include the following information:

·        Date of purchase, receipt, sale, or exchange of digital assets

·        For any digital asset received as income or payment, its fair market value in U.S. dollars

·        Similar to stocks, taxpayers should track their number of shares or units

Records must be sufficient for a taxpayer to establish their reported income in federal tax returns.

If a digital asset is an investment, it should be taxed as a capital gain. Taxpayers should also identify whether an asset is a short- or long-term capital gain.

Being paid with cryptocurrency, even if a taxpayer isn't an employee, qualifies as ordinary income. Independent contractors who receive cryptocurrency as payment must report the virtual currency's fair market value in U.S. dollars at the date of receipt as self-employment income.

Cryptocurrency is an emerging topic, and its rules may differ from those of traditional, more established areas of currency, property, and income. Keeping current on the law and any relevant regulations can be the difference between adhering to the tax code and facing criminal charges.

An Experienced Tax Attorney Can Help

If you have questions about cryptocurrency and taxes or how to report income, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.