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Crypto Weekly

What happens if you fail to disclose crypto activity

this tax season Kate Dore

'You're playing with fire if you don't report it.'

POINTS TO NOTE

ƒ Your tax return includes a question about "virtual currency," making it clear you must report crypto activity. ƒ If you fail to report transactions to the IRS, you may be subject to interest, penalties, or criminal charges. ƒ If you don't report it, you're playing with fire," said David Canedo, a CPA and tax specialist product manager at Accointing.

Recent years have seen a significant expansion of the crypto ecosystem. Institutions such as the IMF embrace its innovations, but they also warn investors to exercise caution. Experts warn that hiding taxable activity could lead to IRS trouble. It may appear less appealing to report last year's cryptocurrency profits on your tax return after recent market dips. Bitcoin peaked at nearly $69,000 in November 2021, and Ether grew to almost $5,000 during the same period. While values dropped in December, many investors still had sizable gains.

And the IRS has made it clear they are watching with a yes or no question about "virtual currency" near the top of the first page of your tax return. "That's where the hammer comes down because they can say that you lied on a government document under penalties of perjury," said Ryan Losi, a Richmond, Virginia-based CPA and executive vice president of accounting firm PIASCIK.

How crypto taxes work

Cryptocurrency may be subject to capital gains when exchanged or sold at a profit. Swapping digital coins, cashing out for U.S. dollars, or even making a purchase may be taxable events, Losi explained. The gain or loss is the difference between your purchase price, known as basis, and the value when selling or exchanging, and your tax rates depend on the length of ownership.

If you held digital assets for more than one year, you might qualify for longterm capital gains rates of 0%, 15%, or 20%, depending on your taxable income. However, according to a CNBC survey, many crypto investors sell or exchange more frequently, triggering short-term capital gains, levied at regular income tax rates, up to 37% for top earners. What's worse, figuring out your basis to calculate your crypto tax bill may not be easy with limited reporting from digital currency exchanges.

What happens if you don't report taxable activity

If you don't report taxable crypto activity and face an IRS audit, you may incur interest, penalties, or even criminal charges. It may be considered tax evasion or fraud, said David Canedo, a Milwaukee-based CPA and tax specialist product manager at Accointing, a crypto tracking, and tax reporting tool. While the chances of IRS scrutiny are lower with limited staffing, the agency may pursue more significant amounts of money, he said.

For example, Canedo said there's a big difference between buying Bitcoin in 2012 and cashing out millions of dollars in 2021 versus small trades for $100 profit. But you still have to disclose everything regardless.

"You're playing with fire if you don't report it," he said.

Although the IRS has a three-year lookback for errors, Canedo said there is no statute of limitations for fraud. Another risk is whistleblowers, who can report missing activity to the IRS for a percentage of penalties collected, Losi from PIASCIK said. "The number one way the IRS finds out about tax cheats is a former business partner or former spouse," he said. 

CNBC

Crypto Weekly

Quantum Computers Can Break the Encryption of Bitcoin

Adam Hunt

The size of a quantum computer required to break Bitcoin's encryption is estimated in a new study. The research team created a tool to determine how big a quantum computer needs to be to solve two different problems: cracking the encryption of Bitcoin and simulating the molecule responsible for biological nitrogen fixation. Moreover, such a quantum computer would need to be errorcorrected, allowing more extended algorithms to be run at the expense of more qubits. These conditions are described in the journal AVS Quantum Science.

"We introduce extra qubits if needed to achieve the desired runtime, which depends on the rate of operations at the physical hardware level," said Mark Webber of the University of Sussex. "Our tool automates the calculation of the error-correction overhead as a function of key hardware specifications. To run the quantum algorithm faster, we can perform more operations in parallel with more physical qubits."

RSA encryption and the elliptic curve algorithm used by Bitcoin, both widely used encryption techniques, will one day be vulnerable to quantum computers, which are exponentially more powerful than classical computers in terms of breaking encryption.

Using the window of time between the announcement of a transaction and its integration in the blockchain, estimated to be between minutes and hours, the researchers estimated the size of the quantum computer necessary to break the encryption. "State-of-the-art quantum computers have only 50-100 qubits. Our estimated requirement of 30 [million] to 300 million physical qubits suggests Bitcoin can be considered safe from a quantum attack for now, but devices of this size are generally considered achievable, while future advancements may bring the requirements even lower," said Webber.

According to Webber, "four years ago, trapped ions would need a billion physical qubits to break RSA encryption, requiring a device with an area of 100by-100 square meters. Today, with improvements across the board, this could be reduced to 2.5-by-2.5 square meters." 

tweaktown

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