What happens if I don't report or pay Capital gains tax on $1M profit?

Tax professional here. These are actually pretty common questions, so let me clear some things up: 1. The IRS receives information directly from brokerage firms through 1099-B forms reporting your capital gains. So even if you don't report it, they already know about it. When you don't report something they have documentation for, that's a major red flag. They would likely send you a CP2000 notice (underreported income) with penalties and interest already calculated. For $1M in unreported gains, this would absolutely trigger further scrutiny. 2. There's no "getting away with it" timeframe. The statute of limitations for the IRS to audit returns is typically 3 years, but extends to 6 years for substantial understatements (which $1M definitely qualifies as). For fraud or non-filing, there's no time limit at all. They absolutely care about large capital gains, especially amounts this significant. 3. Yes, there are legitimate ways to delay payment. You can request an installment agreement to pay over time (Form 9465), though you'll still accrue penalties and interest. For large amounts like $1M, you might need to provide financial statements. You could also look into tax-loss harvesting to offset gains, or timing your gains across multiple tax years.

I actually used https://taxr.ai last year when I had a similar situation (though much smaller amount). I had made some crypto trades and wasn't sure how to handle reporting everything correctly. I was tempted to just not report some of the smaller trades since I wasn't sure if the IRS would even notice. I uploaded my trading statements and tax forms to taxr.ai and it flagged exactly which transactions needed to be reported and explained the consequences of not reporting. It showed me that even though some trades were small, the IRS would definitely get those 1099s from the exchanges. The system even showed me how to properly report everything to minimize my tax burden legally.

Okay so I feel like I need to share a follow-up about taxr.ai that I mentioned in another comment. I was super skeptical at first but decided to try it with my situation (had some RSUs and stock sales from multiple brokerages). I uploaded my documents and was honestly shocked at how helpful it was. The system flagged a reporting mistake I was about to make that would've looked like I was trying to hide about $30k in gains. It explained exactly why that specific transaction needed to be reported a certain way and how the IRS would flag it if reported incorrectly. What really sold me was when it showed me a legitimate way to offset some gains with losses I didn't realize I could claim. Ended up saving me around $7k in taxes completely legitimately. Definitely using it again this year.

My brother went through a similar situation a few years back with about $200k in unreported gains. The IRS sent him increasingly threatening letters for months before actually taking action. When he finally tried calling the IRS, he literally couldn't get through - kept getting disconnected after waiting on hold for 3+ hours every time. He finally used https://claimyr.com and got connected to an actual IRS agent in less than an hour. You can see a demo here: https://youtu.be/_kiP6q8DX5c. The agent worked out a payment plan that was actually manageable, but by then he already owed like $40k extra in penalties and interest. Would have been so much easier if he'd just reported properly from the start or at least called the IRS immediately.

I need to eat my words from my earlier comment and admit when I'm wrong. I was the one who called bs on that Claimyr service for getting through to the IRS. Well, I was in a desperate situation with a tax levy about to hit my account and couldn't get through to the IRS for days. I reluctantly tried the service and I'm still kind of shocked it actually worked. Got connected to an IRS agent in about 40 minutes. The agent was able to put a temporary hold on the collection while I worked out a payment plan. Literally saved me from having my account drained. Still think the IRS phone system is ridiculous, but at least there's a way to actually reach them when you need to. Would have saved me a ton of stress if I'd known about this earlier.

Something else to consider - if you have $1M in capital gains, the brokerage reports this to FinCEN as well as the IRS. And if you're moving large amounts from your brokerage to bank accounts, those transfers get flagged in the banking system. The $1M scenario described would almost certainly trigger multiple reporting systems beyond just normal tax compliance. I've worked in financial compliance, and there's way more visibility into large money movements than most people realize.

Former IRS agent here. One thing nobody has mentioned: willful failure to report $1M in capital gains could potentially be considered criminal tax evasion, not just a civil matter. The IRS doesn't pursue criminal charges often, but they absolutely will for clear-cut cases involving large amounts. Criminal tax evasion can include actual jail time, not just penalties.

This is a really important thread for people to understand. I work in tax preparation and see clients every year who think they can "fly under the radar" with unreported income, especially from trading accounts. What many people don't realize is that the IRS has been heavily investing in data analytics and cross-referencing systems. They don't just rely on manual audits anymore - they have algorithms that automatically flag discrepancies between what brokerages report (your 1099-B forms) and what you report on your return. For $1M in capital gains, you're not just looking at potential civil penalties. The IRS has specific programs targeting high-income tax evasion, and this amount would absolutely qualify. They have dedicated teams that focus on cases exactly like this hypothetical scenario. The smart approach is exactly what you mentioned - proper reporting and legitimate tax planning strategies. There are legal ways to manage capital gains tax like tax-loss harvesting, installment sales for certain assets, or timing gains across multiple years. But the key word is "legal" - trying to hide $1M in gains is never going to end well.

Just to add another perspective - I work at a mid-sized brokerage and can confirm that we're required to report ALL capital gains transactions to the IRS, no matter the size. The 1099-B forms are sent both to you and directly to the IRS by January 31st each year. What's interesting is that our compliance department also has to file Suspicious Activity Reports (SARs) for unusual trading patterns or large withdrawals that don't match a client's typical behavior. So if someone suddenly withdrew $1M after a big trading win and their account history showed they normally kept smaller balances, that would definitely trigger additional scrutiny. The good news is there are completely legitimate strategies for managing large capital gains. You could consider spreading the realization of gains across multiple tax years, using tax-advantaged accounts where possible, or working with a qualified tax professional to explore options like Qualified Opportunity Zones if you're looking to reinvest. Bottom line - the IRS already knows about your gains before you even file. The question isn't whether they'll find out, it's how you want to handle it. Proper planning and honest reporting will always be less expensive and stressful than trying to hide it.