Cryptocurrency Transaction Reporting

Recently the Internal Revenue Service sent over 10,000 letters to taxpayers who the IRS believes may have failed to properly report their cryptocurrency transactions.  Three different letters were sent – Letters 6173, 6174 and 6174-A.  Each of these letters indicate that the IRS has information regarding a failure to report digital gains.  Taxpayers have also started receiving tax notices assessing additional tax from their cryptocurrency transactions.  Let’s look at the letters first.

Although similar in purpose, Letter 6173 requires a response within 30 days and warns that if they don’t hear from you by the “respond by” date, they “may” refer your tax account for examination.  Not the sort of thing you want to leave to chance.  Your response could be the filing of a return, amending a previously filed return or providing a statement stating that you believe you followed all of the tax and informational reporting requirements.  If you respond declaring you followed all the rules, you’ll do so under penalties of perjury, so you best make sure you did, in fact, follow all the rules.  A discussion with your tax advisor might be in order.

Letters 6174 and 6174-A are basically informational and don’t require any response but 6174-A adds, “we may send other correspondence about potential enforcement activity in the future.”  In other words, you may not have heard the last of this.  In Letter 6174,  although not requiring a response, the IRS explains they have reason to believe you perhaps need to revisit your cryptocurrency transactions and report them.  However, they don’t plan to follow-up.  Even so, if you had cryptocurrency gains in the past, it’s time to become familiar with the reporting requirements.

As the IRS continues to send out these letters, the Service is now sending CP2000 notices proposing additional tax based on transactions reported to them by cryptocurrency exchanges.  We should emphasize that the amount of additional tax is a proposed amount and is likely not the actual amount you may owe.  Since the IRS only has information reported to them, the CP2000 notice is reporting the gross amount of the transaction.  Therefore, you can significantly reduce the amount of the tax by reporting the cost basis of the transaction.  Of course it is your responsibility to maintain adequate records of your transactions, however, your cryptocurrency exchange may be able to provide the necessary cost basis information.  The key though is, don’t panic, but don’t ignore it because it won’t go away and will only get worse.  You have thirty days to respond, so don’t procrastinate.

These letters and notices are a wake-up call for anyone who has invested in cryptocurrency or received cryptocurrency in payment for goods or services.  Even if you feel you have properly reported your transactions, now might be the time to discuss this issue with your tax adviser.  The IRS issued Notice 2014-21 to help taxpayers understand how virtual currency is treated under the current tax law and is presented in a question and answer format.  From now on, reporting cryptocurrency transactions will be as commonplace as reporting your interest and dividends.

While the future of cryptocurrency is considered volatile and there are a lot of unknowns, we are dedicated to helping you stay at the forefront of virtual currency. We are closely monitoring the progression of cryptocurrency transactions and how they are treated for federal tax purposes.

If you have concerns, questions, or perhaps would like to learn more about cryptocurrency, please give us a call today.