Why is the IRS so Interested in Crypto?
By Michelle Bielecki on ALTCOIN MAGAZINE
The IRS has focused its efforts on cryptocurrency. The reason is abundantly clear — most crypto holders aren’t paying their taxes. In an effort to collect what it’s owed; the IRS has launched an aggressive campaign on cryptocurrency holders in the last few months. Will it get the results it’s hoping for? Seeing as this is a government entity, probably.
You Have To Pay To Play
Is crypto tax evasion really that big of a deal to the IRS? Absolutely. In 2015, the government reported that only 802 cryptocurrency users reported their capital gains and losses. In 2018, reports showed that as little as .04% paid their taxes the previous year. And when Coinbase, the leading cryptocurrency exchange in the United States, had an estimated 11.7 million users at the end of October 2017, it makes sense that the IRS would peruse this cause.
What’s The IRS Doing?
So, how it the IRS going after cryptocurrency holders who haven’t filed their taxes? The same way they go after everyone who hasn’t filed their taxes — through the mail. That’s right; the IRS has sent one of three letters to more than 10,000 crypto traders telling them that they need to review their taxes and correct the information for returns from 2013–2017.
- Letter 6173 — If you didn’t report your cryptocurrency transactions for one or more years between 2013 and 2017, this letter is letting you know that the IRS noticed. If you did submit your returns, then the government believes you are missing a form or some other information. This is the only letter that requires an immediate response.
- Letter 6174 — If you got this letter, the IRS knows you are a crypto holder and believes you have an error on a past return or didn’t file at all. Basically, this is your chance to fix this issue before things get serious.
- Letter 6174-A — Just like Letter 6173, this letter is sent to cryptocurrency holders who have failed to report their taxes. The difference is that the IRS only thinks you filed incorrectly. If they were more serious, you would’ve gotten the other letter instead. Regardless, you still need to take corrective action.
In addition to these three letters, the IRS has also sent out Letter CP2000. If you received this in the mail, pay attention. Instead of speculating about whether you did or didn’t file your taxes, this letter lays out exactly what the IRS thinks you owe. Pretty serious, right? Well, it might not be as bad as you think. In actuality, the government knows that you have cryptocurrency, but your tax returns don’t match the information they’ve received from a third-party (like the data it subpoenaed from Coinbase). But the thing is, crypto exchanges only submit 1099-K forms, which shows the gross amounts of your transactions. It doesn’t show your crypto gains or losses, and that is the information your taxes are based on.
What Can You Do?
So, let’s say you got one of these letters from the IRS. What’s next? Check your past tax returns. If you know you didn’t file your crypto taxes between 2013 and 2017, get on it! If you’re in the minority in the crypto world and you did file your taxes, recalculate everything. This might seem like a pain, but it’s better for you if you can go back to the IRS with the correct amount you owe than trying to avoid the situation and getting audited.
Who You Gonna Call?
If you had someone prepare your crypto taxes for you, you need to reach out to that person. If you didn’t have anyone help you with your taxes but want someone to help you now, there’s one thing to keep in mind: Not all tax professionals can do crypto taxes. This is a specialized area of taxes, and it’s still relatively new in the tax world. Even places that claim they can handle your taxes can get it wrong. For example, last year, one of the biggest self-prepare tax software companies mistakenly told customers that they could use form 1099-K to submit their taxes. In reality, they really needed to use Form 8949 and list every crypto transaction independently.
The other issue many tax professionals are facing is that there is very limited government guidance for crypto taxes. The IRS claims that it will be providing more details soon, which would be the first update since 2014. So, unless the person or company has received the right training on crypto tax issues, you may need to find someone else. Want to put your tax pro to the test? Ask them if you can file your crypto taxes with form 1099-K (no), or ask how crypto is taxed (as property). If they give you a different answer or don’t know, it’s time to move on.
The IRS is coming for crypto users, and they aren’t going to stop anytime soon. If you’re in its sights, don’t ignore it. Protect yourself while you still have time. Otherwise, be prepared to face the consequences.
Source 1: https://fortune.com/2017/03/19/irs-bitcoin-lawsuit/
