The Internal Revenue Service (IRS) Sends Out 'Crypto Tax Compliance' Letters To Investors

The Internal Revenue Service (IRS) Sends Out ‘Crypto Tax Compliance’ Letters To Investors


The U.S. Internal Revenue Service (IRS) is once again sending out letters to cryptocurrency investors notifying them to pay their taxes and those that haven’t filed their taxes correctly. The taxman is increasing its efforts in collecting crypto transaction taxes, and those yet to file could be subject to “future civil and criminal enforcement activity.

The letter obtained by BEG dated Aug. 14 and sent to one of the investors' reads,

“We have information that you have or had one or more accounts containing virtual currency but may have not properly reported your transactions involving virtual currency, which includes cryptocurrency and non-crypto virtual transactions.”

Since the reveal of this letter by CoinTracker.io, a crypto tax service, several virtual asset holders in the U.S. have confirmed receiving similar letters. The “soft letters” from the IRS aims at spurring investors to correctly file their taxes and pay up any taxes yet to be filed, failure to which the taxman will escalate the issue into an audit of the investors’ assets.

According to the letter, IRS clams virtual currencies represent property and are subject to a federal income tax. All crypto holders need to report sales, exchanges, and other transactions using cryptocurrencies. The report explains transactions using virtual assets as paying for goods and services using crypto, and exchanging the crypto for fiat or other cryptocurrencies. The directive covers all U.S. citizens, whether in the country or abroad.

This means that any trade and exchange made using cryptocurrencies must be reported to the IRS – including the day trading activities. Notwithstanding, employees receiving crypto as payment are also subject to an income tax.

A closer look at IRS’ crypto tax filing letters

Shehan Chandrasekera, CoinTracker’s head of tax and strategy, tweeted out an explanation of the different types of letters sent out to crypto investors. The bulk of the letters sent out – Letter 6174s – propose a less strict stance by the IRS, Shehan explains.

“In case if you get one, don't panic. 6174 & 6174-A are less severe educational letters. If you believe you filed your crypto taxes right, no action is needed. If you missed any crypto portion when you filed or you didn't file a return, you must amend or file a new return.”

However, investors who receive the Letter 6173 should be warier as they “need to respond to this letter by the date printed on the letter” or risk auditing.

Is IRS ignoring its own watchdog?

The taxman first sent out these ‘soft letters’ in 2019, raising several issues on privacy and overall tax guidance by tax advocates across the country. When the first batch of letters was rolled out in early September last year, a Taxpayer Advocate Service advocate, Erin Collins, wrote a letter to Congress complaining about the Letter 6173 violated users’ privacy.

Chandan Lodha, a co-founder of CoinTracker, said the U.S. government is increasing its efforts to capture crypto tax offenders through subpoenas to non-US exchanges like Bitstamp and Coinbase. Moreover, the government also blockchain analytics software like Chainanalysis and Coinbase analytics.

He said,

“They have even gone so as far as to start trying to de-anonymize on-chain privacy coin transactions.”

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