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Digital assets could lead to tax audits and even criminal charges

On Behalf of | Mar 25, 2022 | Uncategorized

Human lives are increasingly digital. People socialize on the internet and even go online to meet prospective romantic partners. They can file their tax returns online and buy all of their household needs with a few clicks or taps on a smart device.

The switchover to digital space has not just involved electronic transactions for real-world goods. It has also started to produce its own, electronic economy. A decade ago, the idea of electronic money or cryptocurrency was new and strange. These days, it is a booming investment market.

In 2021, non-fungible tokens (NFTs) became an economic hot topic. Experts estimate that the NFT market reached $44 billion in 2021, and early signs show that 2022 will likely see even more explosive growth in this unique marketplace. If you have invested in digital assets, and they could come with significant tax liabilities.

You have to report digital assets

As someone filing a United States income tax return, you have an obligation to report all of your assets and revenue. Even property owned in other countries and international bank accounts require disclosure to the Internal Revenue Service (IRS).

Your digital assets are no exception. You will need to report your cryptocurrency and NFT holdings. You may also need to pay taxes on those assets when you transfer them and make money. There are rules in place for cryptocurrency transactions, but NFTs are still a gray area. While the IRS does want you to report and pay tax on them, they have not released official guidance on the tax rate or any other details for these unique, new assets.

What happens if you aren’t honest?

It may seem like the IRS wouldn’t have very few options for tracking down those who are dishonest about their digital property. After all, the blockchain system used for cryptocurrency transactions makes the entire system relatively anonymous.

However, the IRS knows about these transactions and has made a concerted effort to tax them. If you gamble on the idea that the IRS won’t find out about your cryptocurrency transactions or NFT sales, you could lose. Not only could you wind up with a massive past-due tax bill subject to interest and penalties, but you could potentially face text evasion charges.

Keeping up-to-date on changing tax laws can help you avoid violating them when filing your income tax return.