“People still think that crypto is kind of invisible to regulators,” Chandrasekera tells CNBC Make It. “Truthfully, there are so many ways the IRS knows you’ve had something to do with crypto.”

In fact, failing to report income, gains or losses from your crypto transactions on your taxes may come with stiff consequences. This may include potential audits, penalty fees, interest charges on unpaid taxes or even criminal charges.

Remember, the IRS expects you to report all of your taxable crypto transactions from throughout the year when filing your taxes, no matter how much or how little you may have earned or lost.

If you use a centralized exchange, like Coinbase, and earn $600 or more in a given year, the exchange will send a 1099 miscellaneous form to both you and the IRS.

However, crypto traders using centralized exchanges shouldn’t solely rely on those companies to correctly determine their crypto earnings, income or losses, especially if they’re trading on multiple exchanges and making transactions from their own self-custodial wallets, Chandrasekera says.

“These exchanges only have visibility into what’s happening inside their platform,” he says. “Most of these tax forms may be incomplete or inaccurate because exchanges don’t know what the taxpayer is doing outside of that exchange.”

That’s why precise record keeping is key when it comes time to report your crypto earnings to the U.S. government.

It’s up to you to keep a record of all of your gains and losses.

However, keeping track of each of your crypto transactions and how much various coins were worth when you bought and sold them can be difficult.

Crypto tax software tools like CoinTracker or Koinly can help you keep an accurate record of your crypto activities and automatically generate the proper forms you’ll need when filing your taxes, Douglas Boneparth, certified financial planner and president of Bone Fide Wealth, tells CNBC Make It.

The IRS treats virtual currency as property for federal income tax purposes, according to its website. That means crypto is subject to capital gains and losses, which are typically taxed at a lower rate than ordinary income.

Say you purchased crypto during the year and later sold it for more than what you paid. Come tax time, you would owe a capital gains tax on the profit earned from the sale. For example, if you bought $100 worth of crypto and later sold it for $300, your $200 profit would be subject to capital gains tax.

Virtual currency can be subject to both short-term capital gains tax, which is when you sell crypto you’ve had for less than a year, or long-term capital gains tax, which is when you sell crypto you’ve held for over a year.

If you bought crypto and later sold it for less than the price you paid for it, that would be considered a capital loss.

If your capital losses exceed your annual capital gains, the IRS allows investors to reduce their regular taxable income by up to $3,000 per year, depending on the extent of their losses. For instance, if your losses exceed your gains by $500, you can deduct $500 from your regular taxable income.

For more information on how to file your taxes when you own crypto, check out the IRS’s frequently asked questions.

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