Tax season is here. Whether you’re new to buying bitcoin or a longtime crypto investor, now’s the time to start preparing your income tax return. 

It’s easy to focus more on the attention-grabbing threats when securing your bitcoin, ether, and other assets, such as hacks and exchange collapses. Poor tax planning is an often underestimated threat that can put you and your assets at risk.

Please note this article is provided for informational purposes only and is not intended as tax advice. At Casa, we’re not tax advisors but our friends are. We’ve recently partnered with IRS Guard Dog, a service offered by CryptoTaxAudit to help you protect yourself and stay in compliance with your taxes.

Tax season is here. Whether you’re new to buying bitcoin or a longtime crypto investor, now’s the time to start preparing your income tax return. 

About IRS Guard Dog

IRS Guard Dog is a tax advisory service that monitors your status with the IRS and allows you to mobilize an audit defense quickly while keeping an eye out for refunds you might not otherwise know about. In this article, we’ll explore why it makes sense to have a tax expert in your self-custody toolbox.

The IRS is paying attention to digital assets

One misconception among investors is that the IRS is not interested or capable of enforcing tax regulations with crypto. This could not be further from the truth.

Whenever BTC, ETH, and other assets increase in price, it typically results in increased attention from the news media, social media, and law enforcement agencies. Moreover, there’s a perception among tax authorities that crypto investors, like other early tech adopters, are wealthier than the average taxpayer. 

Bitcoin is more than 15 years old. Even if the U.S. government isn’t fully orange-pilled at this point, the IRS is still interested in collecting tax revenue from these assets.

Why tax preparation matters for self-custody

Holding your keys is an excellent way to secure your assets without relying on trusted third parties. Going it alone on your taxes, however, can be rather difficult and risky.

Bitcoin and digital assets are a relatively new form of investment, and their tax treatment is evolving over time. If you’re not a tax professional, it can be hard to keep up with changes to the tax code. And the risks of getting your taxes wrong are substantial.

Even if you’re not too keen on fiat currency, Uncle Sam wants his dollar. Tax penalties can include hefty fines and even jail time. Ignoring the IRS is a dangerous risk to you and your bitcoin you don’t have to take. 

Similar to how Casa makes self-custody easy for you, working with a tax expert is a smart, proactive approach to staying compliant. Trust us: you don’t want to be the investor who HODLed bitcoin through bull and bear markets only to sell off a stash to pay back taxes. Security is about planning ahead and that includes tax preparation.

Two types of tax non-compliance

While the U.S. tax code is complex, there are two primary ways to get in trouble with the IRS: not filing income tax returns and under-reporting income.

Not filing tax returns is a bad idea, especially in years when you lock in high income. The IRS knows if you haven’t filed in a while or at all, so suffice it to say you’re on their radar if you’ve sold a lot of bitcoin recently, started driving a sports car, and didn’t file a tax return.

Hiding income and profits from the IRS isn’t an option either. In recent years, centralized exchanges began filing forms with the IRS, so it’s reasonable to assume they know you’ve sold bitcoin even if you don’t report transactions. Receiving crypto is also taxable income which goes for tips, airdrops, or staking rewards, so it’s crucial to keep track of even transactions that take place outside of exchanges.

Did you sell assets last year? Remember capital gains

The IRS considers digital assets to be property, like a house, stock, or car, which means whenever you sell crypto, it’s a taxable event and could result in you owing capital gains taxes to the IRS.

Capital gains are an important consideration of holding any investment, including crypto, and amounts can vary depending on how you’ve held the asset in question. If you sold or paid for goods or services with bitcoin, you could owe the IRS capital gains taxes. 

To calculate your capital gains, you will need to know your cost basis, or the price at which you acquired assets. For instance, if you trade bitcoin, you would need to know bitcoin’s market price at the time you bought and sold it. Similarly, keeping track of timestamps is important because the amount of capital gains you owe can vary depending on how long you’ve held your assets.

Maximize your tax refund the right way

Tax planning isn’t just about managing risk — if done correctly, you can also make the most of opportunities. Savvy investors understand proper tax preparation can sometimes work in their favor. 

An expert tax professional can help you identify possible deductions from your taxable income so you don’t overpay the IRS. For instance, if you sold bitcoin during a bear market for a loss, a tax professional can show you how to properly claim the loss and carry it forward to future tax years, a process known as tax loss harvesting

If you take a DIY approach to your taxes, it can be all too easy to get this calculation wrong. With time and expert tax advice, you can learn to make every transaction count.

Don’t wait for an audit — get proactive now

All too often, investors think they can wait for an IRS audit to get their taxes in order. In reality, that strategy can lead to rather painful results. Audits can be time-consuming, stressful, and costly, and when they happen, representing yourself can be a risky strategy. When you’re notified of an audit, you are essentially under investigation. Anything you can say can be used against you in a court of law. It’s wise to put your best foot forward.

The good news is audits can be managed and avoided with an expert on your side who speaks the same language as the IRS.

IRS Guard Dog helps you stay ahead on your tax preparation. They monitor your status and can notify you in advance of an upcoming audit, so you can update your recent filings. With plans as low as $12 a month, you can receive a monthly report of your tax status so you can stay duly informed of any new changes. They also provide individual consultations to help you prepare for current and future capital gains.

Self-custody is about peace of mind, and you can maintain it with smart tax planning through IRS Guard Dog. Because every sat counts.

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