Have you received a Crypto Letter from the IRS? Have you bought, sold, received, or paid someone in Bitcoin or virtual currencies (crypto or non-crypto), particularly between 2013 and 2017? Are you sure you reported it correctly on your tax return?
In 2018, the IRS announced a Virtual Currency Compliance campaign to start reining in non-compliance related to virtual currency transactions. As part of an educational outreach effort, the IRS recently sent letters to “taxpayers with virtual currency transactions that potentially failed to report income and pay the resulting tax…or did not report their transactions properly”. By the end of August, over 10,000 taxpayers will have received one of three letters: Letter 6173, Letter 6174, or Letter 6174-A.
What do the letters say?
All three letters remind taxpayers of some high-level information related to virtual currencies. Some highlights:
- Virtual currency is considered property for federal income tax purposes
- US taxpayers must report all sales, exchanges, and other dispositions of virtual currency
- An exchange includes using a virtual currency to pay for goods, services, or other property, including another virtual currency (e.g. exchanging Bitcoin for Ether)
They also provide various actions that should be taken to ensure that taxpayers are in compliance.
Why three different letters?
The three letters vary slightly in what they say and what they require a taxpayer to do:
Letter 6173
- Requests that you either file any missing returns, amend any returns filed with incorrect information, or provide a “statement of facts explaining your position”, a history of your transactions, an explanation of what you did in order to become compliant with reporting requirements, and any documents available to back up your statements.
- Allows for a 30-day extension of time to respond to the notice (must be requested by taxpayer).
Letter 6174
- Requests that you either file any missing returns or amend any returns filed with incorrect information. It does not request any additional information.
- Provides detailed information about several schedules on which a taxpayer may report virtual transactions currencies, such as Schedule C, Schedule D, Schedule E.
- States that when filing returns (amended or delinquent), write “Letter 6174” at the top of the first page of the return.
- Does not require a response.
Letter 6174-A
- Requests that you either file any missing returns or amend any returns filed with incorrect information. It does not request any additional information.
- Provides detailed information about several schedules on which a taxpayer may report virtual transactions currencies, such as Schedule C, Schedule D, Schedule E.
- States that when filing returns (amended or delinquent), write “Letter 6174” at the top of the first page of the return.
- Does not require a response.
In conclusion…
Did you receive one of these letters? Have you been a party to virtual currency transactions in the past and aren’t sure if you reported correctly? Are you involved with them now and want to make sure you stay complaint? Let us know! We can work together to make sure that you cover your bases and stay compliant.
Virtual currencies are a new and evolving area for the tax code, and rules and regulations on this topic are subject to change. You should always consult your tax advisor before making any tax planning decisions, filing any returns, or responding to a tax notice.