If you fail to report cryptocurrency transactions on your tax return, you're taking a risk.

• The IRS has provided guidance on how to respond to the cryptocurrency query on the tax return form.
• If you bought and held cryptocurrency with U.S. dollars or transferred digital assets between your wallets, you may have experienced fluctuations in the value of your investments.
• Did you sell crypto, exchange one virtual currency for another, use it for purchases, receive it as payment, acquire it through mining or staking?

The IRS has provided guidance on how to respond to the cryptocurrency query on the tax return form.

According to the agency, you will need to respond to a yes-or-no question about virtual currency, regardless of whether you engaged in a transaction in 2021.

Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, stated that the wrong response may flag his return.

In 2021, did you engage in any transactions involving virtual currency?

If you bought and held cryptocurrency with U.S. dollars or transferred digital assets between your wallets, you may have experienced fluctuations in the value of your investments.

Yes, if you have sold crypto, exchanged one virtual currency for another, used it for purchases, received it as payment, acquired it through mining or staking, and more.

If you select "yes," you are signaling to the IRS that they will need to review your Schedule D for any capital gain or loss.

The tax deadline is in 4 weeks, and filers need to be aware of certain things. The IRS has sent out more than 45 million tax refunds, which is the average payment. The tax return backlog will be cleared by the end of 2022, according to the IRS commissioner.

If you have taxable activity and answer no, experts advise that there may be bigger issues.

According to Ryan Losi, a CPA and executive vice president of PIASCIK based in Richmond, Virginia, the hammer comes down because they can penalize you for lying on a government document.

As the April 18 deadline approaches, it may become more challenging to seek guidance from a tax professional with crypto expertise if you're unclear on reporting.

What to know about crypto taxes

The exchange or sale of cryptocurrency at a profit may result in capital gains tax, according to Losi.

The value of your gain or loss is determined by subtracting your purchase price, or basis, from the value at which you sell or exchange, and your tax rates are based on the duration of your ownership.

You may be eligible for long-term capital gains rates of 0%, 15%, or 20% if you held digital assets for more than one year and your taxable income falls within certain brackets.

According to a CNBC survey, many crypto investors frequently sell or exchange their holdings, resulting in short-term capital gains that are taxed at regular income tax rates, with top earners facing a tax rate of up to 37%.

Determining your crypto tax bill may be challenging due to limited reporting from digital currency exchanges.

Failure to report

Failing to report taxable crypto activity could lead to an IRS audit, resulting in interest, penalties, or even criminal charges.

David Canedo, a Milwaukee-based CPA and tax specialist product manager at Accointing, stated that it may be considered tax evasion or fraud.

Officials may pursue larger amounts of money despite the lower chances of IRS scrutiny due to limited staffing at the agency, he said.

Disclosing everything is necessary, whether you made a small profit of $100 or cashed out millions of dollars, according to Canedo.

If you don't report it, you're playing with fire, he warned.

Canedo stated that while the IRS has a three-year timeframe for identifying errors, there is no time limit for detecting fraud.

Another risk is that whistleblowers can report missing activity to the IRS and receive a percentage of the penalties collected, as Losi from PIASCIK stated.

A former business partner or spouse is the most common way the IRS discovers tax cheats, according to him.