In the early days of the cryptocurrency craze, every Bitcoin trader diligently recorded their cost basis, logged their capital gains, and reported it all to the IRS.

Just kidding.

“Oh heck no,” says Ryan Losi, a CPA with accountants and tax planners Piascik in Richmond, Va.

Indeed, the whole crypto arena was something of a financial Wild West, with federal authorities scrambling to figure out how to treat it all for tax purposes.

Now, though, is a different story. In particular, you might notice a little question on this year’s tax forms, right under where you have to print your name and address:

“At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

“They’re laying the trap,” says Losi. “Then the hammer is going to come down.”

In other words, if you have been dabbling in Bitcoin, you may very well owe some taxes to Uncle Sam.

Cryptocurrency is treated as property, so in general terms, think of it like a stock: If you bought some and still own it, then there has been no taxable event, and you won’t owe anything on the transaction.

However, if you sold some—presumably at a profit, since Bitcoin has soared to levels of over $56,000, as of this writing—then you have realized gains, and those need to be reported.

“If you sold crypto at a profit and that money is going into your bank account, then you owe taxes,” says Ben Weiss, president of CoinFlip, the nation’s largest network of Bitcoin ATMs. “At this point the government is very aware of crypto cashouts, so don’t assume you can get away with it.”

Like other capital gains, they fall into short-term and long-term buckets, and the tax treatment is different. Short-term gains, where the cryptocurrency was held for under a year, are treated as ordinary income, which implies a range of possible rates up to 37%.

Long-term holdings of over a year are treated more favorably, at 0, or 15 or 20% depending on income level. That highest bracket only applies to those with annual income approaching half a million dollars a year, which won’t apply to the vast majority of filers.

If you have losses, you can write some of those off to offset other gains. The annual maximum for such writeoffs is $3,000, although losses beyond that amount could be carried forward to future years.

Paper trails

So what about keeping track of all this stuff? That’s where tax season can get trickier for crypto enthusiasts. If you bought and sold on the same platform, like Coinbase or Robinhood, then the documentation can be more straightforward.

But if you bought and sold on different exchanges, then the cost basis and the gross proceeds will be known by different institutions, and it’s your obligation as the taxpayer to stay on top of that and compile the necessary information.

Thankfully there are a growing number of crypto portfolio trackers that can help. Two excellent ones are Blockfolio and Delta, advises CoinFlip’s Weiss.

The danger of sloppy documentation: If the IRS knows your proceeds but doesn’t know your cost basis, they could very well treat it all as 100% profit, and make you prove otherwise. Given Bitcoin’s current sky-high valuation, that could lead to a suggested tax bill that would make your eyes pop out of your head.

If you are hoping that federal authorities just don’t know about your trades, well, they are getting better at it. Crypto exchanges are reporting those with more than $20,000 in proceeds and 200 transactions, so if you get a 1099 form to that effect, rest assured the IRS has it too.

Another more complicated scenario is if we’re not talking about buying or selling Bitcoin, but receiving it as payment for goods or services in a trade or business—in which case it’s treated as taxable income—or using it as a means of exchange to buy goods and services, like an ebullient young trader going out and buying a Lamborghini.

In that case the transaction can be considered akin to a sale—taking the value of your crypto on the day of the purchase or exchange, comparing it to your original cost basis, and then owing capital gains on the difference.

If you have been careless with all this stuff, there is always the option to revisit past years and file amended returns. That’s certainly preferable to more extreme outcomes the IRS warns of, like prison terms and fines of up to $250,000 for tax evasion and filing false returns, in additional to the usual penalties and interest.

“Since the value of cryptocurrency has skyrocketed in the last 15 months, more clients have been calling than ever,” says Losi. “But they don’t usually like the news I have to share.”