Did You Trade Crypto This Year? 3 Common Tax Mistakes That Could Cost You Big Time—And How To Avoid Them

Cryptocurrency investors face increased scrutiny from tax authorities this filing season, with potentially costly consequences for those who misunderstand reporting requirements.

The Internal Revenue Service considers every cryptocurrency transaction taxable, even those that don’t involve conversion to dollars.

“A lot of people still believe crypto-to-crypto trades aren’t taxable because they never receive cash in hand. Unfortunately, this is not the case,” Shehan Chandrasekera, head of tax strategy at CoinTracker, recently told CNBC.

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Exchanging bitcoin for ether triggers a taxable event under IRS rules, which treat cryptocurrencies as property subject to capital gains tax. If the traded cryptocurrency appreciated since purchase, the transaction generates reportable gains.

Beyond misunderstanding crypto-to-crypto transactions, investors make two other critical errors, according to Chandrasekera. Many assume tax liability exists only when they receive forms from trading platforms, while others fail to maintain comprehensive transaction records.

“I see these all the time,” he told CNBC.

Though cryptocurrency exchanges increasingly issue tax documentation, the forms often miss transactions across multiple platforms or self-hosted wallets, leaving investors responsible for tracking their own activity.

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“It may seem tedious, but failing to record every trade, swap or airdrop can lead to errors in calculating gains and losses — and eventually, trouble with the IRS,” Bone Fide Wealth President Douglas Boneparth said to CNBC.

Investors must report cryptocurrency holdings even without transactions, checking “Yes” on tax returns if they acquired digital assets during the year.

Non-compliance carries significant risks. Failing to report cryptocurrency transactions can trigger audits, penalties, interest charges on unpaid taxes, and even criminal prosecution in severe cases. 

The IRS penalties structure typically includes a percentage of unpaid taxes plus interest, with rates increasing for willful non-compliance.

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Tax enforcement capabilities have expanded significantly. “The IRS has become much more sophisticated in tracking crypto transactions,” Boneparth said. That includes requiring more exchanges to report user activity and employing blockchain analytics to identify unreported transactions.

Specialized software solutions can help maintain accurate records. “Going forward, meticulous record keeping isn’t just good practice — it’s essential for staying compliant and avoiding potential penalties,” Boneparth added.

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