The U.S. Internal Revenue Service (IRS) is sending taxpayers who have conducted cryptocurrency transactions friendly reminders to pay their cryptocurrency taxes. These so-called “soft notices,” according to tax information website IRSMind, have been circulating since June 2019 to individuals who may have neglected to report (or underreported) their cryptocurrency gains on their recent taxes. The number of notices sent is likely more than 10,000, officials from the IRS have said, and they will continue to be mailed through August.
“We have information that you have or had one or more accounts containing virtual currency but may not have properly reported your transactions involving virtual currency, which include cryptocurrency and non-crypto virtual currencies,” a letter on the matter reads.
There are three tiers of notices that noncompliant taxpayers may receive. The first, a letter 6174, informs the recipient that they have likely neglected to report cryptocurrency trades on their taxes and asks them to check their returns for any misreporting and file an amended return accordingly. No response, however, is necessary and the IRS won’t follow up on these requests; these are more of an educational warning.
A letter 6174-A is similar to the former, only more consequential. After sending this letter, the IRS may follow up with actual enforcement, and it signals that the recipient has been put on notice for being noncompliant.
Lastly, a letter 6173 indicates alleged noncompliance. Taxpayers who receive this letter can expect a follow-up to determine whether or not they’re playing by the rules.
A Generic IRS Mailing Campaign
If you received one of these letters and didn’t report cryptocurrency transactions on your tax return, then there’s no reason to fret, so long as you submit an amended tax return. But you may have received one of these letters even if you have accurately reported your cryptocurrency gains in your latest round of taxes. If you fall into the latter category, there’s probably even less reason to worry. The IRS is just testing the waters and using its findings as a learning experience.
“IRS Letter 6174-A has all the markings of a generic mailing campaign, and not a personally targeted enforcement action,” Tyson Cross, a tax attorney for Cross Law Group, writes in a Forbesarticle. “This would seem to indicate the IRS is sending these letters to taxpayers as a fishing attempt without any real belief that each recipient has under-reported.”
Cross adds that he, along with several of his colleagues, has clients who have received these letters even when they’ve properly reported their cryptocurrency activity for the 2018 fiscal year. That’s why, he believes, this is a test run of sorts for the IRS to gauge how many compliant vs. noncompliant users there are out there — and to nudge the more sluggish taxpayers to cough up a piece of their crypto profits.
"Although it's possible the IRS used its document-matching program to identify suspected tax cheats and send them this letter, that doesn't seem to be the case. It's much more likely that the IRS is sending this letter to all 14,000 taxpayers identified by the 2017 Coinbase summons as part of a broader effort to encourage voluntary compliance,” he writes, alluding to the IRS seizing personal information on a handful of Coinbase customers with over $20,000 invested in bitcoin and other cryptocurrencies.
This would sync up well with the IRS’s launch of its cryptocurrency compliance campaign, Cross continues, which the agency started a year ago this month.
Crypto Tax Compliance Still a Headache
The effort underscores how unwieldy cryptocurrency use can be for tax compliance, and how the IRS is scrambling to keep up with the rate of crypto investment in the U.S. — and, arguably, using an incongruous tax scheme to keep pace. Under the current model, each trade (e.g., ether to bitcoin, bitcoin to litecoin, etc.) is regarded as a taxable event, meaning, if you bought bitcoin at $10,000 and then converted it into ether at $12,000, you just realized a taxable $2,000 gain.
For traders, the mandate drums up a financial migraine for reporting gains and losses, and for the IRS, labyrinths of wallets, exchanges and altcoins would make tracking noncompliant individuals a toilsome endeavor. After substantial backlash from the Bitcoin community about these rules, the IRS announced this spring that it would look to amend its approach to provide greater clarity.
This article is for informational purposes only and should not be considered tax or accounting advice. Always seek guidance from a tax accounting professional when assessing your individual tax situation.