Did You Receive the IRS Letters? Here’s How You Can Avoid Trouble

Cryptocurrency has been growing in popularity and influence over the last few years – and the Internal Revenue Service (IRS) is taking notice. The revenue service recently began sending out 10,000 letters to crypto investors, which are intended to be stern reminders about tax compliance.

Given the agency’s record for criminal investigations, the move has caused panic among many crypto owners, as the IRS letters are being sent even to those who already filed their crypto taxes. The IRS states that it discovered the targets of these letters through ongoing compliance efforts.

The head of the tax body, Commissioner Chuck Rettig, warns that crypto taxpayers must take these letters seriously and, upon receiving a letter, should carefully review their prior tax filings. Let’s take a closer look at the IRS letters that are being sent out.

Letter 6173 – The One You Are Obliged to Answer

If you received this letter, you must respond to it – no ifs, ands, or buts. This letter is meant to inform you that the IRS has credible data regarding one or more accounts containing virtual currency that might not have met tax obligations. If you get this letter, make sure to amend any and all prior returns or, if you don’t think there’s an issue, provide a statement outlining why you believe that you are in full compliance.

Letter 6174 – The One That Gives You Advice

This letter aims to inform taxpayers that the IRS has data regarding one or more virtual currency account(s) they may own. The letter provides detailed guidance on virtual currency taxation as well as how to report various virtual currency transactions. The IRS urges taxpayers to review their tax returns and amend them if necessary. This IRS letter is a “soft notice” and so doesn’t require a response if the receiver feels there is no issue.

So, what should you do?

The guidelines that the IRS released in 2014 regarding the taxation of cryptocurrency state that virtual currencies are recognizable as assets. This means that Bitcoin that is bought, appreciates in value, and is then sold, will be subject to capital gains tax. On the other hand, if you buy Bitcoin and it depreciates in value, you can report it as a capital loss. 

Capital losses and gains are fully deductible against each other and you are not just limited to gains from cryptocurrencies either. If you sold your house for profit but lost an equal amount in your crypto investments – you don’t have to pay any tax! You still need to report your transactions though. In order to report your crypto gains you should:

1. Calculate your Capital Gains

You incur capital gains every time you sell or trade a cryptocurrency. For each trade that you make, you will need to determine the cost basis. “Cost basis” is a technical term referring to the original cost of your virtual currency, including any fees. You then need to determine the Fair Market Value of the received assets at the time of the trade. Finally, to get your capital gains, you simply subtract the cost basis from the Market Value. You need to do this for all your trades and sells!

2. File the right forms

The forms you need to file are Schedule D and Form 8949. Form 8949 is where you will declare all your transactions and the resulting gains, you should separate long-term and short-term trades as they are taxed differently. Any asset that was sold within a year of purchase will result in a short-term gain and is taxed at your regular income bracket. Assets held for longer than a year will result in long-term gains which are generally taxed at a lower rate (between 0 to 20%). Schedule D is just a summary of Form 8949.

The IRS is just getting started!

At times, you may think that not reporting your capital gains to the IRS means no one will discover your crypto investments. However, with these letters and their ongoing efforts to combat crypto tax evasion, the IRS has proven that it can and will go after cryptocurrency traders. 

While the IRS letters are mostly just warnings and unlikely to result in any penalties (as long as you amend incorrect tax forms), this should be seen as the first step in a long-term effort to get more crypto traders to comply with their tax obligations. The IRS has always maintained that taxpayers who fail to properly report their income tax risk penalties and even criminal prosecution. If you feel you have not declared your taxes correctly, you should consider hiring the services of crypto accountants who can guide you through the next steps. Their experience will save you both time and money.

And they are not alone…

As the IRS has busied itself sending out letters, HM Revenue & Customs, the UK’s tax body, has increased their efforts to pressure crypto exchanges to hand over their clients’ names as well as transaction histories. This is an attempt to retrieve unpaid taxes from said crypto investors. A similar move was made by the IRS in 2017, which demonstrates that tax bodies all over the world are becoming more and more dedicated to reaching the last of the crypto traders.

Final Words

Everyone who has received these IRS letters will tackle the situation with varying degrees of concern. However, you are advised to take action and respond if need be, as this is the easiest way to remain safe and on the right side of the law. If you are a professional trader you will do well to add taxes to your trading strategy – remember, there are ways to minimize your tax-liabilities but the key to doing that is being proactive and learning how crypto taxes work.

Author Name: Robin Singh
Robin Singh is the co-founder and CEO of Koinly.io ( https://koinly.io ), a cryptocurrency tax platform that automatically generates crypto tax reports for USA, Canada, Sweden & other countries.