If you trade in cryptocurrency, you already know that 2022 was a bad year for the market, with many top cryptos worth a fraction of what they were a year ago. But that does not mean you will automatically be safe from IRS scrutiny.
When you suffer a net capital gains loss on the year, one silver lining is you usually can claim the loss on your income taxes as a deduction of up to $3,000 or the total loss, whichever is lower. And if your losses exceed that limit, you can carry the loss forward to future tax years.
Enforcement expected to increase over the next decade
But just as the IRS watches out for taxpayers underreporting their income, they can also red flag a tax return that appears to overreport the taxpayer’s losses. The agency has been focused especially on crypto-related claims since at least 2019. And as part of the Inflation Reduction Act passed earlier this year, the IRS will receive $45 billion over the next ten years earmarked for enforcement, including “digital asset monitoring and compliance activities.”
How to shield yourself from an audit
The best way to protect yourself from a possible audit over a capital gains or loss on your income taxes is to ensure the information on your 1099. However, the IRS could still randomly select your return for auditing, or subpoenas sent to cryptocurrencies could result in information leading to an audit of one of your returns. The best thing you can do after receiving a letter from the IRS is to discuss it with a tax attorney.