What does a crypto tax audit look like?

Put simply, an audit is a review of your financial records and tax payments to ensure you’ve paid the correct amount of taxes. With the development of blockchain technology came a challenge for tax authorities around the world: how to ensure people are meeting their tax obligations when interacting with what is (largely) a decentralized industry. Authorities around the world are now developing sophisticated data-matching technologies, as well as working with centralized crypto exchanges to ensure that no one is evading their obligations.

How does a crypto tax audit work?

In a traditional audit, things like payslips, bank statements, and other financial records are used to examine the validity of your tax report submissions. In the crypto world, an audit looks relatively similar.

Depending on your jurisdiction’s guidelines, your tax authority may request the following:

• All of your wallet and blockchain addresses.

• All of your digital currency exchange accounts (including DEX) accounts.

In addition to this, you may also need thorough records of the following:

• The date and time of each transaction

• The value of the cryptocurrency in your local currency at the time of the transaction (which can be taken from a reputable online exchange)

• What the transaction was for and who the other party was

• Receipts of purchase or transfer of cryptocurrency

• Exchange records

• Records of agent, accountant and legal costs

• Digital wallet records and keys

• Software costs related to managing your tax affairs

Of course, just like a traditional audit, tax authorities can also request additional information depending on the situation in question so be prepared for anything.

Crypto tax audits in Australia

In Australia, the ATO has stated that you need to keep records for five years from whichever was completed the latest out of:

• When you prepare or obtain your records

• When your transactions or actions are complete

• The year that the CGT event happens.

You should keep records long enough to cover the period of review (also known as the amendment period) for an assessment that uses information from the record. Your records must be in English or be translatable to English and in writing, however they can be electronic or paper.

The ATO has also provided a comprehensive list of what records they expect you to keep for crypto tax purposes. These are as follows:

• Receipts when you buy or transfer crypto assets

• Exchange records

• Records of agent, accountant and legal costs

• Digital wallet records and keys

• Software costs that relate to managing your tax affairs.

• The date of the transaction

• The value of the crypto asset in Australian dollars at the time of the transaction

• What the transaction was for and who the other party was (even if it’s just their crypto asset address).

Crypto tax audits in the United States

In the US, all audits include tax returns and associated records that are filed in the last three years. If the IRS identifies a ‘substantial error’, they have unlimited power to add additional years to the requirements. If they identify a missing or fraudulent return, there is no time limit.

In the US, if you undergo a crypto tax audit you will be expected to provide the following:

• “All wallet IDs and blockchain addresses owned or controlled by taxpayer.”

• “All digital currency exchanges (DCE) and peer-to-peer (P2P) facilitators”

• “The date and time each unit of virtual currency was acquired,”

• “The basis and FMV of each unit at time of acquisition,”

• “The date and time each unit was sold, exchanged, of otherwise disposed of,”

• ��The FMV of each unit at the time of sale, exchange, or disposition, and the amount of money or the FMV of property received for each unit.”

• “Explanation of the method used to compute basis relating to the sale or other disposition of virtual currency.”

Once again, there is the possibility that the IRS will request additional information.

Crypto tax audits in the United Kingdom

In the United Kingdom, tax returns sent on or before the deadline of the relevant financial year require records to be kept for at least 22 months after the end of the tax year. Tax returns sent after the deadline will need to be kept for at least 15 months after your sent the tax return. If the HMRC suspects deliberate tax evasion, they can investigate as far back as twenty years.

In terms of what account records the HMRC expects you to keep (at minimum), these are outlined below:

• Paper (cold) wallets containing the individual’s public and private keys

• Electronic (hot) wallets on devices

• Other records of their transactions and balances such as downloads of their wallet activity from a cryptoassets exchange

• Hardware (cold) wallets looking like a USB, containing the individual’s public and private keys.

In terms of individual transactions, the onus is on the individual to keep their own records for each cryptoasset transaction, and these must include:

• The type of cryptoasset

• Date of the transaction

• If they were bought or sold

• Number of units involved

• Value of the transaction in pound sterling (as at the date of the transaction)

• Cumulative total of the investment units held

• Bank statements and wallet addresses, in case these are needed for an enquiry or review.

If we haven’t outlined your region in the sections above, we recommend talking to a local tax professional to gain an understanding of what records are needed to comply in your jurisdiction.

How to best prepare in case you get audited

The only way to prepare for an audit is to ensure you maintain a thorough record-keeping process. In regards to crypto activity, there are two main ways of doing this:

1. Creating and maintaining manual records: For people who choose this option, they generally create a spreadsheet which outlines each and every crypto transaction they’ve ever made. Depending on the jurisdiction you’re in and the record-keeping requirements, the level of detail required can be quite intense. As an example, if you’re an Australian crypto user you would have to manually input your exchange records, date and time of the transaction, value of the transaction and/or asset in Australian dollars at the time of receipt, what the transaction was, who the other party was - amongst other things. Doesn’t sound like much fun, does it?

2. Using crypto tax software: There’s an easier option, thankfully! Our platform came into existence because our founder tried the method above, and found that it just wasn’t realistic. The time, the effort… It just wasn’t. It was a nightmare! A crypto tax platform like ours takes the majority of the manual effort out of the process; by importing your data, allowing our algorithm to work its magic, and then reconciling any remaining instances, you will be able to calculate details for all the records you’re required to keep. Once your data is reconciled, you will have access to records of all of this and more: cost bases, dates, times, types, units, value in local currency, the list goes on.

Disclaimer: The content of this guide is for general informational purposes only. It is not legal or tax advice. Viewing this guide, purchasing or using Summ (formerly Crypto Tax Calculator) does not create an attorney-client relationship or a tax advisor-client relationship.

The information in this guide represents the opinions of experienced crypto tax professionals; however, some of the topics in this guide are still subject to debate amongst professionals, and tax authorities could ultimately release guidance that conflicts with the information in this guide. The information contained in this guide is based on the authors’ interpretation of current guidelines. Changes to the guidelines may be retroactive and could significantly alter the views expressed herein. Therefore, use this information at your own risk and for information purposes only.

Consult a professional regarding your individual tax or legal situation.