Should I Amend My Tax Return for Crypto

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It is becoming increasingly clear that the government is paying a lot of attention to crypto, which means that investors may want to take another look at their old tax returns.

Tax preparation 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 getting off to a slightly slower pace, experts say. This can be a problem if you have invested in crypto in recent years, experts say, because if the IRS audits previous returns and discover that you have not properly reported crypto gains, you may be subject to tax on them.

“A lot of people who have been in this space for a number of years came up to me and said, ‘Hey, look, I haven’t reported for the past four years and now I realize I have to report this year,’” says Kate Waltman, a New York-based certified public accountant specializing in crypto and blockchain assets. This oversight had more to do with regulatory uncertainty than foul play, experts say, as consumers waited to see how the federal government would handle the burgeoning digital asset class.

Thankfully, being behind on reporting your crypto gains to the IRS isn’t the end of the world — but you should probably consider adjusting returns that had major omissions. Let’s see why you might want to change your old tax return if you didn’t factor in your crypto gains from past years.

When should you change 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 any other information that consumers inadvertently failed to include. Your unreported crypto earnings fall into this category.

To change a declaration, fill in: Form 1040-X (Amended US Individual Income Tax Return). Formal changes are for adjustments that would change your tax return or amount owed, such as not including crypto capital gains tax.

If you owe additional tax on undeclared crypto winnings, you can avoid excessive fines by submitting an application an amendment fast and paying the tax before any due dates. Ideally, you should try to pay on the original due date for the tax return year (this is only possible if you amend last year’s return before your tax payments are due). Otherwise, try to pay on the due dates you received after submitting the change.

Currently, normal processing time is: up to 20 weeks, from the usual 16 weeks. Some delays may occur due to errors, address changes, missing information, or routing issues (when sending information through the mail). The IRS recommends waiting instead of filing a second return or calling to check the status.

Can you change your crypto tax reporting from the past few years?

Crypto investors can change the returns that have already been filed in recent years with relative ease. “You have three years to change last year’s returns without negative consequences,” Waltman says. This means that you can electronically submit an amended return application for the years 2019, 2020 and 2021.

It is always ideal to report all crypto capital gains from transactions, non-replaceable token sales, or other decentralized financial activities within the window of the reporting year in which you had the taxable transaction. But making a mistake isn’t something to be ashamed of, Waltman says.

Pro tip

Using a crypto portfolio tracker can help you report more accurately during tax time and avoid forgetting those crypto wallets floating around in the metaverse.

“Maybe you just really didn’t know how or 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 are creating a taxable event for yourself and you will potentially have implications for capital gains,” she says.

The most important thing is that you do your best in good faith and submit your change in a timely manner. Show as much documentation of well-calculated valuations as possible using market data as a backup of valuations of 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 cryptocurrency is one of the biggest obstacles to accurate reporting for newbies and experienced crypto traders alike.

“People have been in this space for so long and finally, for the first time, they’re getting around to putting their… [crypto] taxes,” says David Kemmerer, CEO and co-founder of crypto portfolio tracking software CoinLedger. “They don’t even remember all the different places they have crypto, and it’s going to be very difficult for them to reconcile everything.”

Now that you’re aware of the IRS’s crypto reporting requirements, experts recommend keeping good records of all your digital wallets, centralized exchange platforms, and balances for each account. A portfolio tracker, which links to your crypto holdings and provides a high-level overview of your holdings, can go a long way in making future tax returns a lot easier. Depending on the tracker, you may be able to export your data to tax preparation software, autofill IRS tax forms, and calculate your profits and losses.

Not sure where to start? Read NextAdvisor’s crypto tax guide and read these six questions you might want to ask your tax professional.

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