How Long Do You Need to Keep Cryptocurrency Tax Records According to the IRS? - 2024 - FEDERAL LAWYERS [2024] (2024)

If you’ve invested in cryptocurrency, you’re probably wondering how long you need to keep records of your transactions for tax purposes. The IRS treats cryptocurrencies like bitcoin as property, meaning they are subject to capital gains taxes. But the rules can be confusing, especially since cryptocurrency is still relatively new. This article will break down exactly how long you need to keep your crypto tax records according to IRS guidelines.

The Short Answer

According to the IRS, you need to keep your cryptocurrency tax records for at least 3 years after you file your tax return reporting the transactions. However, if you underreport income by more than 25%, the statute of limitations extends to 6 years. And if you don’t report the income at all, there is no statute of limitations – the IRS can audit you at any time in the future.

IRS Recommendations

The IRS recommends keeping tax records for at least 3 years after you file your return, and longer if you underreported income significantly. Here are the IRS guidelines:

• Keep records for 3 years if you reported all income accurately
• Keep records for 6 years if you underreported income by 25% or more
• Keep records indefinitely if you failed to report income

The IRS treats cryptocurrencies like property for tax purposes. This means you owe capital gains taxes when you sell or trade crypto at a profit. Failing to report these capital gains is considered tax evasion.

Why 3 Years for Accurate Filers?

The IRS generally recommends keeping tax records for 3 years from when you filed your return. This covers the normal statute of limitations – the time period the IRS has to audit you. After 3 years, the IRS can no longer audit you for that tax year (with a few exceptions).

Keeping records for 3 years is important because the IRS typically audits taxpayers within 3 years. By keeping thorough records, you have the documentation to back up your tax return if audited.

When the Statute of Limitations Extends

However, if you substantially underreported income, the IRS gets more time to audit you. If you underreported gross income by 25% or more, the statute of limitations extends to 6 years. This gives the IRS 6 years to audit your return and assess additional taxes.

For example, let’s say you failed to report $20,000 in capital gains from crypto trades on your 2018 tax return. If your total reported income was $80,000, failing to report $20,000 represents 25% of your gross income. So the statute of limitations would extend to 6 years, giving the IRS until 2024 to audit your 2018 return.

No Limit if Unreported Income

Perhaps most importantly, there is no statute of limitations if you completely fail to file a return or report income. In other words, the IRS can audit you and assess taxes and penalties for unreported income at any time in the future.

For instance, if you sold cryptocurrency for a $50,000 profit in 2017 and did not report it on your tax return, the IRS could potentially audit you and assess taxes and penalties for that unreported income many years later.

Other Factors Extending Time Limit

A few other circ*mstances can extend the statute of limitations beyond 3 years:

• The IRS suspects tax fraud – no time limit
• You failed to disclose foreign assets – 6 years
• You corrected your return within 60 days – time extended by 60 days

But in most cases for the average taxpayer, the 3-year, 6-year, or indefinite guidelines will apply when determining how long to keep cryptocurrency tax records.

The Importance of Record Keeping

Keeping thorough records of your crypto transactions is extremely important for multiple reasons:

• Allows you to accurately report gains/losses on your tax return
• Provides support if you get audited down the road
• Avoids penalties for inaccurate or unfiled returns
• Helps determine your cost basis and holding period

Good record keeping shows the IRS you are making a reasonable effort to comply with the tax laws. It includes keeping records of:

• When you acquired the crypto
• How much you paid
• When you sold or traded it
• How much you received

Tips for Keeping Records

Here are some tips for keeping thorough cryptocurrency tax records:

• Maintain records of all purchases, sales, trades, air drops, forks, mining income, etc.
• Keep bank records showing deposits/withdrawals from crypto exchanges
• Retain transaction confirmations, monthly statements, and other documentation from exchanges
• Track transfers between wallets and cost basis of each holding
• Use crypto tax software to import transactions and generate required tax forms
• Consider hiring a crypto tax professional if you have extensive transactions

IRS Enforcement on the Rise

In recent years, the IRS has ramped up enforcement of cryptocurrency tax reporting. Some signs of increased enforcement include:

• Adding the virtual currency question to Form 1040 in 2019
• Sending thousands of warning letters to potential non-filers in 2019
• Requesting records from major crypto exchanges like Coinbase
• Training more IRS agents on crypto taxes and tracing transactions
• Declaring crypto tax non-compliance a priority area

With the IRS cracking down, taxpayers who fail to report crypto transactions accurately or keep proper records are at high risk of being audited down the road.

Proposed Reporting Requirements

In 2022, the IRS proposed new rules that would require crypto brokers to issue Form 1099-B tax forms to customers, starting in 2023. However, this requirement was delayed and is now proposed to take effect in 2025.

Once implemented, these rules will give the IRS much more visibility into crypto transactions. However, even without 1099 forms, taxpayers are still responsible for keeping their own records and reporting crypto activity.

The Takeaway on Keeping Crypto Tax Records

To summarize the key points:

• Keep crypto tax records for at least 3 years, and 6 years if you underreported income
• There is no time limit if you failed to report crypto income entirely
• Maintain thorough records of all crypto transactions and tax reporting
• With IRS enforcement rising, accurate record keeping is essential

By understanding the guidelines around keeping cryptocurrency tax records, you can ensure you are prepared in case of an audit. Proper documentation provides proof to support your tax return and demonstrates your efforts to meet your tax obligations. So make sure to keep reliable records for at least 3-6 years after filing your return reporting crypto activity.