The IRS Is Sending Letters to Cryptocurrency Owners
The IRS is always on the lookout for new revenue sources. As the popularity of cryptocurrency has increased in recent years they have provided guidance on how cryptocurrency is taxed. Most taxpayers, however, have not considered the possibility of needing to pay income tax on their cryptocurrency transactions.
Over 10,000 people will receive letters from the Internal Revenue Service during August 2019. The IRS has obtained data from various sources, including Coinbase, that point them to cryptocurrency owners. These educational letters will take one of three forms - Letter 6174 and Letter 6174-A are informational letters and no action is required. They simply state that the IRS suspects you own cryptocurrency and remind you to pay taxes on it if you have not already. Letter 6173 requires a response by the deadline stated in the letter in order to attempt to avoid an audit.
Note that these letters (especially Letter 6174 and 6174A) are an educational campaign. Although getting a letter from the IRS may sound scary, they are not necessarily accusing the taxpayer of non-compliance. You may have actually met all of your tax obligations and still have received the letter.
The IRS is beginning to take non-compliance with virtual currency taxation very seriously. In addition to these educational letters, they will also focus on audits and criminal investigations in their efforts to collect tax on cryptocurrency.
IRS Treatment of Cryptocurrency
The IRS considers virtual currency to be property for purposes of taxation - just like stocks and real estate. Taxes are based on the cost basis and sale price. As an example, if a taxpayer purchases 1 bitcoin at $10,000 and then sells it for $12,000, they have a $2,000 capital gain on which to pay income tax. The usual property sale rules apply (e.g., short term gain versus long term gain, etc.).
If you have bought and sold stocks, this should all sound familiar - it is the same process.
If a taxpayer believes they owe taxes on cryptocurrency from previous tax years, they should file an amended return and pay the tax, penalties, and interest. All taxable events are reported on Schedule D and Form 8949 in a Form 1040 filing.
The most difficult part of a cryptocurrency tax filing is gathering correct tax basis information. It is usually scattered among many exchanges, wallets, and addresses. Plus, these values are usually only available in the denomination of the virtual currency and not in US Dollars. By their very nature, cryptocurrency transactions can be difficult to trace.
If you are a current client of TFX and received one of these forms, please log in and complete a previous return issue. If you are a new client - please register as a new client for our IRS letter service.