Regulatory Flex Alert
The IRS recently began sending out letters to more than 10,000 digital asset investors who may have inaccurately represented their cryptocurrency holdings on tax filings. While characterized as benign-sounding “educational letters” that simply advise taxpayers to properly report income and pay the resulting tax from virtual currency transactions, these mailings essentially serve as early notices of potential tax consequences for taxpayers who did not file tax returns on their digital assets transactions.
According to IRS Commissioner Chuck Rettig: “Taxpayers should take these letters very seriously by reviewing their tax filings and when appropriate, amend past returns and pay back taxes, interest and penalties. The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
When the IRS talks about “enforcing the law” and “helping taxpayers” in the same sentence, it’s reasonable to interpret this to mean that they are putting priority on the “enforcing the law” part. So, ignore this fairly explicit warning at your own risk.
The letters generated come in three forms: Letter 6173, Letter 6174, or Letter 6174-A, which the IRS stated are intended to help virtual currency owners understand tax reporting obligations. You may receive one of these letters despite being completely in compliance with IRS requirements for all of your cryptocurrency tax reporting.
The type of letter received dictates the actions required. Letters 6174 and 6174-A do not require a response if you have already met the digital asset-related tax filing obligations outlined in the letter. However, they do recommend filing amended or delinquent returns to correct any errors in your tax filings from previous years.
Alternatively, Letter 6173 requires an action. This letter details the necessary documents to provide the IRS, the date to respond by, and other mandatory details. If the IRS does not receive a response from you on time, your tax account may be referred for examination, i.e., an IRS audit may be in your future. A qualified tax professional, together with Lumina’s comprehensive reporting software, can help you maneuver through the compliance requirements of Letter 6173.
The IRS’s ongoing compliance efforts in regards to virtual currencies are consistent with the Virtual Currency Campaign announced on July 2, 2018. The campaign is crafted to address tax noncompliance with respect to cryptocurrencies through multiple avenues such as education, outreach, and examinations. The IRS is continuing to instigate taxpayers with unreported cryptocurrency activity to comply as soon as possible, considering taxpayers choosing to ignore these guidelines may be faced with criminal prosecution.
Why do I need to report my cryptocurrency assets on my tax return in the United States?
The IRS released a guide on virtual currencies in 2014 indicating that cryptocurrencies are regarded as personal property and are taxed as capital assets. Consequently, selling cryptocurrency for fiat currency (e.g. USD) or using it to buy goods or services trigger closed tax lots, hence creating a capital gains taxable event.
Lumina’s comprehensive platform not only offers portfolio management for all your digital assets, but also provides the basis for your cryptocurrency accounting and tax filings. Lumina provides an enterprise-grade accounting solution, including a full general ledger, chart of accounts, as well as an accurate account of each transaction position’s open lots and the cost basis.
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.
