The Internal Revenue Service has started sending letters to cryptocurrency holders this week. Chuck Rettig, IRS Commissioner says “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties” and “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
By the end of August, the IRS is expecting to send over 10,000 letters to taxpayers. There are three possible variations to the letters: Letter 6174 and 6174-A are “no action letters” which means taxpayers do not need to respond to these letters if you have met all of your crypto tax filing obligations. Letter 6173 on the other hand, does require action. If you were the recipient of any of these letters, you should double check your tax return to confirm you are in compliance.
Last year the IRS announced a Virtual Currency Compliance campaign to address non-compliance related to the use of virtual currency. To date, the best information we have from the IRS relating to cryptocurrency comes from Notice 2014-21. The IRS anticipates issuing additional legal guidance in this area in the near future.
Taxpayers who do not properly report the income tax consequences of virtual currency transactions are, when appropriate, liable for tax, penalties and interest. In some cases, taxpayers could be subject to criminal prosecution.
Bottom line, don’t panic. Whether or not you received an IRS letter, take this as a warning and review your taxes. Make sure you are accurately accounting for any cryptocurrency transaction, if necessary, go ahead and hire a professional. Review form 8949, Schedule D, and make sure, if applicable, you filed an FBAR and/or Form 8939.