Cryptocurrency Owners: Is the IRS Watching You?
The IRS has a new target in sight. With the increasing popularity of cryptocurrency, they want to ensure crypto owners are paying their share of taxes. Recently, the IRS mailed out the first 10,000 “educational letters” to crypto account owners reminding them of their possible tax liability owed.
The letter had three versions (6173, 6174, 6174-A), all intended to help taxpayers understand what their tax and filing obligations are and how to fix potential past errors. If you received a letter, the version you received was based on how much the IRS knows about your virtual currency reporting. Let’s dive into this topic a bit more:
Q: What is cryptocurrency?
A: Merriam-Webster states cryptocurrency is “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.” Examples include Bitcoin, Litecoin, Libra, Ethereum, Dash, Ripple, and others.
Q: If I received a letter, what should I do?
A: Don’t put it aside and forget about it! These letters should be taken seriously and responded to promptly – whether it be a response back to the IRS, an amended return, or personal review of filed tax returns to ensure correct reporting. Contact your Adams Brown advisor right away if you receive a letter.
Q: How does the IRS know I own cryptocurrency?
A: The IRS is reaching out to third-party services to obtain tax information on these virtual currencies, which in return are triggering a letter to be generated.
Q: What’s the penalty for ignoring the letter?
A: Possible consequences include being liable for tax, penalties, and interest, and in some cases, criminal prosecution. If you reported incorrectly or mistakenly forgot, you should amend your tax returns. We predict that the IRS will be looking closely at these returns and audits may be following.
Q: If I have crypto assets, shouldn’t I receive a Form 1099 that shows income I received and earned that wasn’t from my employer?
A: In this case, cryptocurrencies are technically classified as property and may not show up on a 1099. Some crypto exchange companies have issued Form 1099-K for large accounts to appease the IRS. It is recommended that you consider using a software program to download all virtual currency transactions to keep accurate records of all transactions. The IRS may use similar software to examine tax returns.
The takeaway here is that the IRS is taking the virtual currency trend very seriously. More IRS guidance will be published soon, but taxpayers should take some time to become fully educated and review previously filed tax returns. Taxpayers be aware as the popularity of cryptocurrency continues to rise, the IRS has a new target in sight!
As always, please contact an Adams Brown advisor for questions, more information, or if you receive a letter from the IRS.