What to expect from a crypto tax audit?

Written by
Samantha Fields
Posted on
May 23, 2022
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Tax rules concerning cryptocurrency can be confusing and the IRS is zooming in on crypto transactions. If you run a web3 business or organization, it's never been more important than now to stay on top of the financial aspects of your business in order to remain in good standing and to get through a possible tax audit. Below, we have some information on preparing for an audit of your crypto business. If you're interested in learning more about crypto taxes, check out our interview with the Head of Strategy at CoinTracker.

Are crypto tax audits common?

Most crypto investors who report their crypto-taxes in good faith will probably never have a crypto-tax audit. However, if you are part of a web3 organization or a DAO and your revenues come from cryptocurrencies, you may be subject to a potential tax audit- especially as the IRS has been paying more attention to crypto of late. This is one of the reasons why keeping all the information on your different transactions, tax payments and crypto management is highly important. Moreover, tax and regulatory agencies all around the world are focusing more and more on cryptocurrencies due to its rise in popularity among corporates.

If you receive a request for inspection, don't worry. While the checklist can contain many questions and requests for transaction histories, you probably have all the necessary information available for your crypto-tax accounts. With IRS audits that can span six years back, this is all the more reason that businesses need to be meticulous keeping records of past crypto transactions. If you do find your business getting audited by the IRS here are the most common requests.

The most common IRS requests

Although audit requirements may vary in content, there are a few common introductory questions the IRS will ask you about your cryptocurrency taxes. When responding to the IRS, it is a best practice to respond clearly and in an organized manner to each request.

Common requests from the IRS :

  • Wallet ID and blockchain address owned or controlled by taxpayers.
  • Any digital currency exchanges with email address, user IDs, account numbers related to those platforms and IP addresses.

Here is all the different information that the IRS requires concerning your transactions :

  • The date each unit has been sold, exchanged or disposed of.
  • The basis and FMV of each unit at the moment of acquisition.
  • The date and time each cryptocurrency has been acquired.
  • FMV per unit at the time of sale, exchange or liquidation and monetary value received by FMV ownership for each unit.

Recently, we have seen more and more audit letters coming from the IRS asking  specific questions that are much more complex to answer than previous standard ones. This has included requesting correspondence with different counter parties on all crypto transactions (tweets, emails, messages…) for example. You should also be aware that the IRS may ask you for some additional information depending on your initial responses.

How to get through a crypto audit?

The most useful elements to have on hand to survive a crypto tax audit are thorough records of your financial transactions. As we know, crypto transactions can be notoriously difficult to account for and funds are often stored on a variety of wallets across multiple chains.  

For more complex audit questions, you'll have to demonstrate that your tax calculation follows all of the cost basis for your audit trail. Having a CPA on hand can help you answer the details of loans and margin activities.

Multis: Gathering the information necessary for a crypto audit

Multis accounts provide users with a single source of truth to track all of your organization's crypto and can be used in the event of an IRS audit.  Accounts are equipped with:

If you use Multis to track all of your organization's crypto, you can have key information necessary to provide in the event of a tax audit at your fingertips.

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