For tax purposes, the U.S. Internal Revenue Service (IRS) treats virtual currency and cryptocurrency as property. Taxpayers who receive virtual currency or cryptocurrency as payment for goods or services are required by the IRS to include the fair market value of the currency when computing their gross income.1 This requirement applies even if the taxpayer did not receive a payee statement for the transaction (such as a Form W-2, Form 1099, etc.).2
It is estimated that thousands of cryptocurrency owners have failed to pay taxes and are liable to penalties.
Recently the IRS has begun sending out letters to taxpayers they have identified as having virtual or cryptocurrency transactions which were not reported as income.3 They are also sending letters to those whose virtual or cryptocurrency transactions were reported incorrectly.
The more than 10,000 taxpayers who will receive letters by the end of August were identified through various ongoing IRS compliance efforts according to the IRS.4 There are three variations of the letters being sent (Letter 6173, 6174 or 6174-A). Letter 6173, Reporting Virtual Currency Transactions, states that “generally U.S. taxpayers must report all sales, exchanges, and other dispositions of virtual currency” further stating that “this obligation applies regardless of whether the account is held in the U.S. or abroad.”5 Letter 6173 requires the taxpayer to contact the IRS to file a delinquent return, reporting any virtual currency transactions; or file an amended return to correct the reporting of any virtual currency transactions; or provide a detailed explanation of why the taxpayer believes they reported their virtual currency transactions correctly. Letter 6174 and 6174-A do not require taxpayer action if the taxpayer feels that all requirements set forth in the letters have been met. Information helping the taxpayer to understand their tax and filing obligations and how to correct past errors is including in these letters.
This letter campaign is part of a broader IRS Virtual Currency Compliance campaign which the IRS announced last year. The IRS campaign is addressing non-compliance issues through a number of efforts from taxpayer education to audits to criminal investigations.6 Cryptocurrencies were identified last year by the IRS as one of five areas where taxpayers could easily avoid taxes.7 Don Fort, head of IRS Criminal Investigations, recently indicated that the agency is currently involved in a number of criminal tax evasion cases involving digital currencies.
As cryptocurrency investments have escalated so have the investment scams surrounding them. Both the IRS and the SEC have and will continue to act. If you have questions about cryptocurrency scams or tax disputes surrounding cryptocurrency investments, talk to a Securities Attorney today.
The Law Offices of Peter C. Rageas can help. Our experienced securities lawyers can handle a wide variety of legal matters including securities litigation, broker misconduct, FINRA matters, and more! Call us today for a case evaluation.
1,6 IRS Notice 2014-21, IRS Virtual Currency Guidance
2 IRS Letter 6174, Reporting Virtual Currency Transactions
3,4 IRS has begun sending letters to virtual currency owners advising them to pay back taxes, file amended returns; part of agency’s larger efforts, IR-2019-132, 7/26/2019
5 IRS Letter 6173, Reporting Virtual Currency Transactions
7 IRS is tracking down 10,000 cryptocurrency owners who may have failed to pay taxes, Bloomberg News, 7/26/2019