IRS Virtual Currency Tax Letters, Part 2.
Did you execute crypto transactions through an exchange? In a new twist on a standard practice to address unreported income from traditional sources, the IRS recently began issuing CP2000 notices to taxpayers with crypto trading income that does not match information provided to the IRS by third parties. These CP2000 notices follow closely on the heels of Virtual Currency Tax Letters 6173, 6174 and 6174-A, previously issued by the IRS to crypto traders beginning mid-July 2019.
The “third parties” that provided the information that triggered the IRS to issue CP2000 notices include crypto exchanges that issued Forms 1099-K to crypto traders. However, an issue with Form 1099-K is that it only reports income, but not basis, gains, or losses. Therefore, crypto trading income may have been reported to the IRS by crypto exchanges in a way that does not reflect actual gains/losses. Typically, Form 1099-K is used to report income for merchants, with most transactions reported as revenue, rather than any losses that may have occurred.
Next Steps?
- Beware of fraudulent IRS phishing letters. Verify that the CP2000 letter that you receive was actually issued from the IRS.
- Review your cryptocurrency transactions to determine whether the IRS has accurately calculated underreported income/underpaid tax.
- Respond to the CP2000 notice within 30 days. You can either: (1) pay the amount due as calculated by the IRS; or (2) dispute the IRS’s calculation, while also providing an explanatory statement and supporting documentation.
- Consult your legal and/or tax professional prior to responding to the CP2000 notice.
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Disclaimer: Lumina does not provide legal, tax, investment, or other professional advice. Please consult your own legal, tax, or accounting professionals for advice on compliance with applicable state and federal laws. This post is provided for informational purposes only, and is not intended to substitute for professional tax, accounting, audit, or legal advice. Information provided on Lumina is subject to change without notice.
