The IRS announced this week that it is in the process of sending out 10,000 letters during the next month, reminding taxpayers with cryptocurrency accounts about their tax obligations arising from such transactions.
In March 2018, Coinbase was compelled by federal court order to reveal information on customers engaging in digital currency transactions of $20,000 or more during 2013-2015. The Service dropped the other shoe with this week’s announcement, presaging a more robust enforcement effort (expect some criminal tax prosecutions). The announcement, IR-2019-132 (July 26, 2019), is here.
The Letters come in three variations:
Letter 6174 is a “soft notice” containing tax-compliance information and urging review. No response is required and IRS does not intend to follow up. Letter 6174 is here.
Letter 6174-A is a “less soft notice” not requiring response but constituting “notice” for future enforcement actions. Letter 6174-A is here.
Letter 6173 is a “we know you’ve had cryptocurrency accounts” notice and requires a response; the IRS will follow up. Recipients must either update or amend their returns or file a sworn certification of compliance. Letter 6173 is here.
Despite repeated promises, the Service has yet to update its Notice 2014-21 guidance that cryptocurrency is “property” (not currency) with any gain or loss versus the taxpayer’s adjusted basis (on the fair-market-value) of that crypto-currency in each transaction taxable (or deductible) according to ordinary capital gain (or loss) laws. Notice 2014-21 is here.
Tax compliance is likely to involve a substantial effort to trace and value transactions to establish cost-basis and gain or loss for those without account statements or operating under the assumption that their virtual currencies in fact were “currency.”
PartnerTom Potter is a Partner in the firm's Nashville office, and his practice focuses on securities, corporate disputes, and appellate litigation. Tom has over 35 years of experience representing business interests.
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