The IRS has been very active lately. The government agency confirmed that it is currently engaged in the process of sending out 10,000 letters to taxpayers with digital currency transactions that “potentially failed to report income”.
“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,”? ?said? IRS Commissioner Chuck Rettig.
The IRS is currently sending out three types of letters: Letter 6173, Letter 6174, and Letter 6174A. The nature of information the IRS holds on a person determines the type of letter they receive.
Letter 6174? is a “soft notice” that consists of compliance information to help crypto traders understand their obligations. No follow up is required for this letter but you are advised to amend your tax return if you feel you did not file properly. It can also be seen as a “final warning” as the IRS makes it clear it doesn’t intend to follow up.
Letter 6174A? sits between 6173 and 6174. It is similar to 6174 and is being sent to crypto traders who already filed their crypto taxes. If you believe you filed everything correctly, no further action is needed. The purpose of this letter is to ensure taxpayers are aware of all the forms that they may be required to file, such as Schedule C, D, E and Form 8949.
Letter 6173? is the only one out of the three which requires your response. If no response is made on your part, the IRS will follow up. In the response, you must update and amend your returns and send them back to the IRS. In case an amendment is needed, you are required to file? ?Form 1040X? – Amended U.S. Individual Income Tax Return – and send it back along with the corrected or additional documents you did not originally file.
“The names of these taxpayers were obtained through various ongoing IRS compliance efforts,” it is said in the official statement. Two years ago, IRS requested customer information from the major U.S. crypto exchange Coinbase. The database consisted of around 13,000 traders who traded at least $20,000 worth of digital assets between 2013 and 2015.
Although the agency claims it is “sending the educational letters to taxpayers”, it is fairly obvious that the IRS has started tackling the low filing rate for cryptocurrency-related taxes.
The consequences of not reporting crypto gains after receiving such a letter may be huge as you are at a high risk of an IRS audit. Don’t forget that you’re required to report even if you recorded a loss. Additionally, traders who have been mining, staking or lending cryptocurrencies are required to report such income as ordinary income as explained in this crypto tax guide?.
Whichever of the three letters you received, it is advised that you closely review your tax returns given that you are on the agency’s radar. Consider consulting a tax accountant, familiar with cryptocurrencies, if in doubt.
Robin Singh is the CEO and co-founder of Koinly.io, a cryptocurrency tax solution that automates capital gains reporting.
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