REPORTING VIRTUAL CURRENCY TRANSACTIONS
With the issuance of IRS Letter 6173, Letter 6174, and Letter 6174-A the IRS is making good on its pronouncements to pursue cryptocurrency investors, traders, miners, and recipients who have may unreported or underreported income.
The letters appear designed to accelerate voluntary compliance from the recipient taxpayers, and should be heeded as a ramping up of IRS enforcement initiatives. Per the letters, the IRS is focused on enforcing compliance for Tax Years 2013 through 2017.*
If you have filed returns for any of these years that omitted reportable cryptocurrency transactions (i.e. UNREPORTED income), or you are a taxpayer who only partially reported your cryptocurrency transactions and/or took an adjusted basis position that has sense been deemed invalid (i.e. UNDERREPORTED income) you are strongly advised to FILE or AMEND your returns (as applicable).
*presumably 2018 is not explicitly mentioned in the letters, as the extension filing period is still open (through October 15, 2019) as of the issuance date of the letters.
UNDERSTANDING IRS LETTER 6173, LETTER 6174, AND LETTER 6174-A
When the comparing the language differences in the letters, the Letter 6174 seeks to educate the taxpayer that there are in fact tax reporting requirements related to their cryptocurrency transaction activity. It overviews the reportable cryptocurrency transaction types, and recommends that taxpayer files or amends their return for any applicable period.
The Letter 6174-A states the taxpayer may not have properly reported their cryptocurrency transaction activity. It implies prior filing or awareness by the taxpayer that a filing/reporting obligation exists, and advises the taxpayer to FILE or AMEND their return(s) as appropriate. It suggests that the IRS ‘knows’ the taxpayer has engaged in some form reportable of cryptocurrency transaction activity. It includes a closing caveat that the IRS will likely follow up the contact with additional enforcement actions.
The Letter 6173 requires a direct response within 30 days, to the IRS Group specified on the notice. This direct response requirement differentiates the Letter 6173 as the most urgent of the issued letters. It states the IRS believes the taxpayer has not met their filing and reporting obligations, and implies the IRS has knowledge of income related to their cryptocurrency transaction activities that has not been properly reported. It provides for only three response options:
(1) File any missing (i.e. unfiled) return(s)
(2) Amend any filed return(s) that did correctly report cryptocurrency transactions, or
(3) In lieu of filing, the taxpayer can submit a statement of facts, to include supporting documentation that affirms their position that they are in full compliance with US reporting requirements, signed under penalty of perjury.
Failure to timely respond to the Letter 6173, or request an extension of time to respond, may result in referral of the taxpayer’s account to the Exam (Audit) Unit.
WHAT YOU NEED TO DO IN RESPONSE TO A LETTER 6173, 6174, OR 6174-A
If you have received a Letter 6173, 6174, or 6174-A, you should review your cryptocurrency transaction activity to identify any reportable transactions. In short, every sale, exchange (including payment for goods and services), or disposition of Bitcoin or other virtual currency is a reportable transaction.
It is very likely that you were selected to receive a Letter 6173, 6174, or 6174-A because the IRS already has information that you’ve participated in a reportable cryptocurrency transaction. In fact, some taxpayers have also started to receive IRS CP2000 Notices, which are only issued when the IRS formally acknowledges it has income or payment information that was not included on the filed return, and they are proposing to add the item(s) to the return and adjust your tax obligation accordingly. In many cases the increase tax proposed on the CP2000 Notice is overstated, and should be disagreed with, as the IRS’ income reporting sources don’t factor in basis adjustments, which reduce the realized income.
Now is the time to be intentional about your cryptocurrency compliance obligations. File and/or Amend your returns as applicable, which may include periods before 2013, if your initial cryptocurrency sell, exchange, or disposition first occurred in 2011 or 2012. Where direct response is required for the Letter 6173 or CP2000 Notice, engaging the services of a tax advisor experienced in representing taxpayer’s before the IRS highly recommended.