Emily Clarke

How Does The IRS Track Crypto?

In the last several years, cryptocurrency transformed from niche assets to mainstream investments for both professional and casual traders. The decentralized nature of crypto and its growth potential make it a compelling alternative to traditional stock. However, there's still considerable confusion surrounding its tax liabilities. Take control of your crypto investments today and minimize your capital gains tax. Visit this website to know more details about US Crypto Capital Gains Tax.

Contrary to popular belief, crypto is still subject to taxes. Investors must pay US crypto capital gains tax and take care of all tax duties related to mining, forking, crypto payments, etc. But how do taxes work, and how does the IRS track your investments?

How the IRS Enforces Tax Compliance

Many assume that the IRS cannot know how you invest in crypto. However, that couldn't be farther from the truth. While virtual currency is largely decentralized, the IRS has many ways to monitor transactions and enforce tax compliance.

The IRS gained user information through a subpoena for many domestic and international exchanges. Furthermore, the IRS employs powerful analytics tools like Palantir and Chainanalysis. These tools help link investors to off-exchange crypto wallets and transactions. Even if your trades are seemingly hidden and untraceable, there's a good chance the IRS knows about them.

The federal government also recently passed a law requiring crypto exchanges to report transaction history. The 2021 American Infrastructure bill made it mandatory for brokers and exchanges to send out a 1099-B form, resulting in even more transparency.

How Do Crypto Taxes Work?

The IRS treats crypto as another capital asset. Therefore, it falls into the same category as your traditional stock investments, home and tangible property. Like capital assets, you're subject to a US crypto capital gains tax whenever you dispose of virtual currency or NFTs.

Fortunately, many of the same rules apply. Capital gains tax applies when you sell or trade assets for a higher value than you bought them. However, you can also offset your capital gains with capital losses through tax loss harvesting to minimize your tax obligations.

Crypto taxes also apply whenever you earn assets as payment or through activities like mining, forking, loaning, etc.

Author Resource:-

Emily Clarke writes about portfolio management, finance tracking and Consumer SaaS services. You can find her thoughts at crypto wallets blog.